U S TIMBERLANDS CO LP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2000 Commission File No.: 0-23259

U.S. TIMBERLANDS COMPANY, LP
(Exact name of registrant as specified in its charter)

DELAWARE 91-1842156
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

625 Madison Avenue, Suite 10-B, New York, NY 10022
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: 212-755-1100

-----------------

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class: Name of Each Exchange on Which Registered:

Common Units Nasdaq National Market

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]

The aggregate market value of the Common Units held by non-affiliates
of the registrant, based on the last reported sale price of the Common Units on
the Nasdaq National Market on February 28, 2001, was approximately $57,366,233.

Documents incorporated by reference: None

U.S. TIMBERLANDS COMPANY, LP

TABLE OF CONTENTS

Page

PART I

Item 1. Business........................................................................................1
Item 2. Properties.....................................................................................10
Item 3. Legal Proceedings..............................................................................11
Item 4. Submission of Matters to a Vote of Security Holders............................................11

PART II
Item 5. Market for Registrant's Common Units and Related Security Holder Matters.......................12
Item 6. Selected Financial Data........................................................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................26
Item 8. Financial Statements...........................................................................26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........26

PART III
Item 10. Directors and Executive Officers of the Registrant.............................................26
Item 11. Executive Compensation.........................................................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................37
Item 13. Certain Relationships and Related Transactions.................................................39

PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K........................................41

PART I

Item 1. Business.

General
The business of U.S. Timberlands Company, LP, a Delaware limited
partnership formed in June 1997 (the "Company"), consists of the growing of
trees and the sale of logs and standing timber. The Company owns approximately
553,000 fee acres of timberland and cutting rights on approximately 3,000 acres
of timberland (collectively the "Timberlands") containing total merchantable
timber volume estimated as of January 1, 2001 to be approximately 1.5 billion
board feet ("BBF") in Oregon east of the Cascade Range (the "Timberlands"). Logs
harvested from the Timberlands are sold to unaffiliated domestic conversion
facilities. These logs are processed for sale as lumber, plywood and other wood
products, primarily for use in new residential home construction, home
remodeling and repair and general industrial applications. The Company also owns
and operates its own seed orchard and produces approximately five million
conifer seedlings annually from its nursery, approximately half of which are
used for its own internal reforestation programs, with the balance sold to other
forest products companies. Except as the context otherwise requires, references
herein to, or descriptions of, assets and operations of the Company include the
assets and operations of the Operating Company (as defined below) and the
predecessors of the Company.

The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 47%) and Douglas fir (approximately 13%), species which have
historically commanded premium prices over other softwood species, with the
balance consisting of Lodgepole Pine, White Fir and other softwood species. The
Timberlands have stands of varying ages and are unique in the forests east of
the Cascade Range in Oregon in that approximately 155,000 acres are actively
managed tree farms (the "Plantations"). The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has been
planted each year since then. Currently, the Plantations contain age classes
ranging generally from one to 39 years old. Initial thinning or harvesting of
the Plantation stands is expected to begin within the next three years. The
balance of the Timberlands are composed of natural stands. For a more complete
description of the Company's properties, see "Properties."

In August 1996, U.S. Timberlands Klamath Falls, LLC, a Delaware limited
liability company ("USTK") and U.S. Timberlands Management Company, LLC,
formerly known as U.S. Timberlands Services Company, LLC ("Old Services"),
acquired approximately 604,000 fee acres of timberland (the "Klamath Falls
Timberlands"), containing an estimated merchantable timber volume of
approximately 1.9 BBF and related assets from Weyerhaeuser (the "Weyerhaeuser
Acquisition"). In July 1997, USTK, which is now the Company's subsidiary
operating company (in such capacity, the "Operating Company"), acquired
approximately 42,000 fee acres of timberland and cutting rights on approximately
3,000 acres of timberland (the "Ochoco Timberlands"), containing an estimated
merchantable timber volume of approximately 280 million board feet ("MMBF") from
Ochoco Lumber Company ("Ochoco") (the "Ochoco Acquisition"). At the date of
acquisition, over 40% of the merchantable timber on the Ochoco Timberlands was
at least 80 years old. As of December 31, 2000, the Company has harvested
substantially all of the Old Growth timber on the Ochoco Timberlands. The
average age of the remaining merchantable timber on the Ochoco Timberlands is
approximately 40 - 50 years in age. During October 1999, the Company contributed
primarily non-income producing, pre-merchantable pine plantation timberlands in
exchange for an investment in an affiliate (See Item 13 Certain Relationships
and Related Transactions and Notes 3 and 9 to the Consolidated Financial
Statements).

During the period from January 1, 1994 through the acquisition of the
Klamath Falls Timberlands by USTK, approximately 58% of the logs harvested from
the Klamath Falls Timberlands were delivered to a plywood mill owned by
Weyerhaeuser at Klamath Falls, Oregon. Similarly, prior to the Ochoco
Acquisition, substantially all of the timber harvested from the Ochoco
Timberlands was delivered to Ochoco's mills. The Company does not currently own
any conversion facilities nor does it presently intend to own any such
facilities on a long-term basis;

1

consequently the Company's sales are made to unaffiliated third parties.
Concurrent with USTK's acquisition of the Klamath Falls Timberlands, USTK
arranged for Collins Products LLC ("Collins"), a privately owned forest products
company located within the Klamath Falls Timberlands area, to purchase
Weyerhaeuser's Klamath Falls mill facilities. The Company entered into a 10-year
log supply agreement with Collins (the "Collins Supply Agreement") providing for
the purchase by the plywood mill and delivery by the Company of a minimum of 34
million board feet ("MMBF") of logs each year at market prices. The Collins
Supply Agreement is extendable by Collins for two additional five-year terms. In
addition to its sales under the Collins Supply Agreement, the Company sells logs
to conversion facilities located in the area surrounding the Timberlands. There
are currently more than 50 primary conversion facilities located within a
150-mile radius of the Company's Timberlands.

Formation of the Company

On November 19, 1997, the Company acquired substantially all of the
equity interests in USTK and the business and assets of Old Services (the
"Acquisition") and completed its initial public offering (the "Initial
Offering") of common units representing limited partner interests ("Common
Units"). Upon the closing of the Acquisition, Old Services contributed all of
its assets, including its timber operations, to U.S. Timberlands Services
Company, LLC, a newly formed Delaware limited liability company and the
Company's general partner (the "General Partner" or "New Services"), in exchange
for interests therein. Immediately thereafter, USTK assumed certain indebtedness
(the "Holdings Debt") of U.S. Timberlands Holdings, LLC, an affiliate of USTK
("Holdings"), and the General Partner contributed its timber operations to USTK
in exchange for a member interest in USTK. Then the General Partner contributed
all but a 1% member interest in USTK to the Company in exchange for a general
partner interest in the Company, the right to receive Incentive Distributions
(as defined herein) and 1,387,963 subordinated units representing limited
partner interests in the Company ("Subordinated Units"), and Holdings
contributed all of its interest in USTK to the Company in exchange for 2,894,157
Subordinated Units. The General Partner then distributed the Subordinated Units
to Old Services. Approximately 143,398 Subordinated Units were used by Old
Services to redeem interests in Old Services held by certain founding directors
of the General Partner (the "Founding Directors"). As a result of such
transactions, USTK became the Operating Company and the General Partner owns an
aggregate 2% interest in the Company and the Operating Company on a combined
basis, and the right to receive Incentive Distributions; Old Services owns
1,244,565 Subordinated Units; Holdings owns 2,894,157 Subordinated Units; and
the Founding Directors own an aggregate of 143,398 Subordinated Units. The
4,282,120 Subordinated Units owned by Old Services, Holdings and the Founding
Directors represent an aggregate 32.6% interest in the Company. The Common Units
and the Subordinated Units are referred to herein collectively as "Units" and
the holders of Units are referred to herein as "Unitholders."

Concurrent with the closing of the Initial Offering, the Operating
Company and its wholly owned subsidiary, U.S. Timberlands Finance Corp.
("Finance Corp."), consummated the public offering (the "Public Note Offering")
of $225.0 million aggregate principal amount of unsecured senior notes (the
"Notes). See "Management's Discussion and Analysis Liquidity and Capital
Resources."

The purpose of the Company under the Partnership Agreement is limited
to serving as the non-managing member of the Operating Company and engaging in
any business activity that may be engaged in by the Operating Company. The
Operating Company's operating agreement provides that the Operating Company may,
directly or indirectly, engage in (i) any activity engaged in by USTK
immediately prior to the Initial Offering, (ii) any other activity approved by
the General Partner but only to the extent that the General Partner reasonably
determines that, as of the date of the acquisition or commencement of such
activity, such activity generates "qualifying income" (as such term is defined
in Section 7704 of the Code) or (iii) any activity that enhances the operations
of an activity that is described in (i) or (ii) above. Although the General
Partner has the ability under the Partnership Agreement to cause the Company and
the Operating Company to engage in activities other than the ownership or
operation of timber-producing real property, the General Partner has no current
intention of doing so. The General Partner is authorized in general to perform
all acts deemed necessary to carry out such purposes and to conduct the business
of the Company.

2

Company Structure and Management

The operations of the Company are conducted through, and the operating
assets are owned by, USTK, as the Operating Company. The Company owns a 98.9899%
member interest in the Operating Company and the General Partner owns a 1%
general partner interest in the Company and a 1.0101% managing member interest
in the Operating Company. The General Partner therefore owns an aggregate 2%
interest in the Company and the Operating Company on a combined basis.

The Company's business is managed by the General Partner. The General
Partner does not receive any management fee or other compensation in connection
with its management of the Company, but is reimbursed for all direct and
indirect expenses incurred on behalf of the Company (including wages and
salaries of employees, officers and directors of the General Partner) and all
other necessary or appropriate expenses allocable to the Company or otherwise
reasonably incurred by the General Partner in connection with the operation of
the Company's business.

Conflicts of interest may arise between the General Partner and its
affiliates, on the one hand, and the Company, the Operating Company and the
Unitholders, on the other, including conflicts relating to the compensation of
the directors, officers and employees of the General Partner and the
determination of fees and expenses that are allocable to the Company. The
General Partner has a conflicts committee (the "Conflicts Committee"),
consisting of two independent members of its Board of Directors, that is
available at the General Partner's discretion to review matters involving
conflicts of interest.

The principal executive offices of the Company and the General Partner
are located at 625 Madison Avenue, Suite 10-B, New York, New York 10022. The
telephone number at such offices is (212) 755-1100.

The Timberlands

Timber Growth

Timber growth rates reflect timberland productivity and the rate of
return on a timber investment. Growth rate is an important factor in determining
when to harvest timber and the harvest potential of timberlands over the long
term. Merchantable timber is economically mature for harvesting when its current
growth rate falls below the desired rate of return on the investment in the
standing trees. The average growth rate from regeneration to economic maturity
measures the capacity of the land for timber production. The Company's older and
natural stands on the Timberlands that are expected to provide the near term
harvest have a current average growth rate of approximately 160 board feet per
acre per annum. The younger plantations, that presently have less merchantable
volume, are growing at a rate that is expected to average at least 315 board
feet per acre per annum to economic maturity in 50 to 60 years. This growth rate
is based on calculated volumes at the time of maturity. The Company has achieved
higher growth rates on the Plantations by planting high quality seedlings, by
eliminating competing non-timber growth from the Timberlands and by applying
modern forestry practices to assist the growth of the timber. Currently, nearly
all of the seedlings planted are grown from superior seed produced in the
Company's seed orchard. Management does take action to enhance the growth rate
in the natural stands as well. For example, selective harvesting in the slower
growing natural stands opens up the timber stand allowing for more vigorous
growth of the remaining trees. When it is no longer possible to maintain
acceptable growth rates in these stands they will be harvested entirely and
converted to faster growing plantations.

3

Harvest Plans

The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner in
order to maximize their value over time. Integral to this management process are
the Company's long-term harvest plans. The Company prepares its harvest plans
annually based on analyses of the size and age class distribution of the
Timberlands and the economic maturity of each harvest tract. The factors the
Company considers in determining its long-term harvest plans include, among
other things, current and expected market conditions, competition, customer
requirements, the age, size and species distribution of the Company's timber,
assumptions about timber growth rates which are improving over time as a result
of technological, biological and genetic advances that improve forest management
practices, expected acquisitions and dispositions, access to the Timberlands,
availability of contractors, sales contracts and environmental and regulatory
constraints. The Company's harvest plans reflect the Company's expectations for
each year's harvest, including the sites to be harvested, the manner of
harvesting such sites, the volume of each species to be harvested, the prices
expected to be received for the Company's timber, the amount of stumpage sales,
logging and other costs, thinning operations and other relevant information. The
Company has the flexibility to update its harvest plans during the year to take
into consideration changes in these factors. The Company harvested or committed
to harvest from log, stumpage and timber deed sales 244 million board feet
(MMBF) in 2000 and plans to harvest, or commit to harvest, approximately 150
MMBF in 2001. The Company also sold approximately 14 MMBF through property sales
in 2000 and intends to sell up to 90 MMBF through property sales in 2001. Under
the current harvest plans, the Company intends to harvest its current
Timberlands aggressively over approximately the next six to eight years after
which time the harvest level is expected to decline to a level which the Company
considers to be more sustainable over the long term. Since harvest plans are
based on certain assumptions, many of which are beyond the Company's control,
there can be no assurance that the Company will be able to harvest the volumes
projected in its harvest plans. While the Company's debt obligations place
certain limitations on the harvest plans, the Company believes that it has
sufficient flexibility to permit modifications in response to fluctuations in
the market for logs and lumber and the other factors described above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." If the Company's current harvest plans are pursued unaltered for
the next ten years, if it consummates the land sales contemplated by its
strategic plan and if its other strategic assumptions prove to be accurate, the
Company expects that its timber inventory will decline through 2010 and
Ponderosa Pine volume will increase as a percentage of its total timber
inventory by such date. The Company expects that its inventory would remain
relatively stable thereafter. Long term harvest plans, growth rates and forest
inventory levels will be reviewed during 2001. Such harvest plans, land sales
and other strategic assumptions do not take into account any acquisition that
the Company may consummate during such period.

Access

The Timberlands are accessible by a system of approximately 5,000 miles
of Company-owned and established roadways or low-maintenance roads. The Company
uses third-party road crews to conduct construction and maintenance on the
Timberlands. The Company regularly enters into reciprocal road-use agreements
with the United States Department of Agriculture - Forest Service ("USFS") and
the United States Department of Interior Bureau of Land Management ("BLM") and
cooperates with such agencies in numerous cost-sharing arrangements regarding
jointly used roads.

Sales and Markets

The Company sells its timber through log sales, stumpage sales and deed
sales. Under a log sale, the Company identifies a block of timberland that is
ready to be harvested and solicits offers from its customers for delivery of
logs. After a price and volume have been agreed among the parties, the Company
contracts a third party to harvest the acreage and deliver to a roadside site on
the Timberlands, where a contracted trucking company picks up the logs and
delivers them to the customer. A stumpage sale is similar to a log sale in that
the Company solicits offers from its customers for timber on a block of
timberland that is ready to be harvested. However, under a stumpage contract,
the Company sells the customer the right to harvest the timber, or stumpage, and
the customer arranges to harvest and deliver the logs. Under a stumpage
contract, revenue recognition occurs as the timber is harvested by the customer,
as the Company retains the risk of loss until the timber is harvested. A timber
deed sale is similar to a stumpage sale, except revenue recognition occurs when
the contract is executed, as the Company passes the risk of loss to the customer
when the contract is executed.

4

The Company currently sells its sawlogs or stumpage to unaffiliated
wood products manufacturers and sells its chips to unaffiliated pulp mills or
hardboard plants. The percentage of logs which are sold as sawlogs/stumpage or
pulp logs is dependent upon, among other things, the species mix and quality of
the inventory harvested and the market dynamics affecting the region. Most of
the timber on the Timberlands is softwood, which, due to its long fiber,
strength, flexibility and other characteristics, is generally preferred over
hardwood for construction lumber and plywood. Once processed, sawlogs are
suitable for use as structural grade lumber, appearance grade boards, plywood
and laminated veneer and can also be manufactured for such end uses as window
trim, molding and door jambs. During 2000, sawlogs, stumpage sales and timber
deed sales accounted for approximately 50.0%, 0.3% and 45.4%, respectively, of
the Company's revenue. Chips, which can be used to make hardboard or pulp,
accounted for approximately 0.5% of the Company's revenues in 2000. The market
price of chips has historically been volatile, rising and falling with the price
of pulp. Sales of seedlings accounted for 0.2% of the Company's revenues in
2000. Timber and property sales accounted for the remaining 3.6% of the
Company's revenue in 2000.

The Company's customers include numerous unaffiliated operators of
conversion facilities. Since its acquisition of the Klamath Falls Timberlands in
August 1996, the Company has sold logs and chips from such timberlands to over
25 different customers. Concurrent with the Weyerhaeuser Acquisition, USTK
arranged for Collins, a privately owned forest products company located within
the Klamath Falls Timberlands, to purchase Weyerhaeuser's Klamath Falls mill
facilities. At such time, the Company entered into the Collins Supply Agreement,
a 10-year log supply agreement with Collins providing for purchase by the
plywood mill and delivery by the Company of a minimum of 34 MMBF of logs each
year at market prices. The Collins Supply Agreement is extendable by Collins for
two additional five-year terms. In 2000, timber sales to Collins, Crown Pacific
Partners, Boise Cascade Corporation and Ochoco Lumber Company, combined,
accounted for approximately 58% of the Company's revenue. No other single
customer accounted for more than 10% of the Company's net revenues for 2000.
Collins made its purchases pursuant to the Collins Supply Agreement, while the
other purchases were made pursuant to short-term arrangements. Although the loss
of one or more of such customers or other significant customers could have a
material adverse effect on the Company's results of operations, the Company
believes that the capacity for processing wood fiber in the Company's markets
currently exceeds the supply and that, therefore, such customers could readily
be replaced. There are currently more than 50 primary conversion facilities
located within a 150-mile radius of the Company's Timberlands.

Seasonality

Log and stumpage sales volumes are generally at their lowest levels in
the first and second quarters of each year. Heavy snowfalls in higher elevations
prevent access to many areas of the Company's timberlands in the first quarter.
This limited access, along with spring break-up conditions in March or April
(when warming weather thaws and softens roadbeds), restricts logging operations
to lower elevations and areas with rockier soil types. The result of these
constraints is that sales volumes are typically at their lowest in the first
quarter, improving in the second quarter and at their high during the third and
fourth quarters. Most customers in the region react to this seasonality by
carrying high log inventories at the end of the calendar year at a level that
provides sufficient inventory to carry them to the second quarter of the
following year.

Contributing to this seasonality of log volumes is the market demand
for lumber and related products which is typically lower in the first or winter
quarter when activity in the construction industry is slow, but increasing
during the spring, summer and fall quarters. Log and stumpage prices generally
increase in the spring with this build up of construction activity matching the
timing of re-entry to all forested areas and increased logging activity.

5

Competition

Due to transportation costs, domestic conversion facilities in the
Pacific Northwest tend to purchase raw materials within relatively confined
geographic areas, generally within a 200-mile radius. It is generally recognized
that log suppliers such as the Company provide their market with a commodity
product. The Company and its competitors all benefit from the same competitive
advantages in the region--namely, excess of demand, close proximity to numerous
mills, and positive demographic trends of the Pacific Northwest and the West
Coast. Therefore, the Company and its competitors are currently able to sell all
the logs they are able to produce. Additional competitive factors within a
market area generally will include species and grade, quality, ability to supply
logs which consistently meet the customers' specifications and ability to meet
delivery requirements. The Company believes that it has a reputation as a stable
and consistent supplier of well merchandised, high-quality logs. The Company has
no conversion facilities and therefore does not compete with its customers for
logs. The Company believes that this gives it an advantage over certain of its
competitors that also own conversion facilities.

The Company competes with numerous private land and timber owners in
the northwestern United States and the state agencies of Oregon, as well as
immaterial amounts of foreign imports, primarily from Canada and New Zealand. In
addition, the Company competes with the USFS, the BLM and the Bureau of Indian
Affairs. Certain of the Company's competitors have significantly greater
financial resources than the Company.

The Company believes that it competes successfully in the timber
business for the following reasons: (i) the Company has substantial holdings of
timber properties which include approximately 1.5 BBF of merchantable, good
quality timber, approximately 155,000 acres of plantation timberland and a
full-scale seed orchard and nursery operation located in a region where
conversion facilities have been experiencing shortages in the supply of wood
fiber; (ii) the Company focuses on owning timberlands rather than operating
conversion facilities, which minimizes the Company's cost structure and capital
expenditures, allows the Company to seek the most favorable markets for its
timber rather than being committed to supply its own facilities, and ensures
that the Company will not compete with its customers; (iii) the Company's lean
operating structure allows it to efficiently manage its Timberlands, and should
enable it to acquire additional timberlands without commensurate increases in
overhead; and (iv) the Company's computerized geographic information system
("GIS") enables the Company to evaluate the optimal timing and patterns of the
harvest of its Timberlands and evaluate and integrate acquisitions of additional
timberlands.

Resource Management

Timber Resource Management

All of the silvicultural activities on the Timberlands and the
harvesting and delivery of logs are conducted by independent contractors. The
Company's operations involve intensive timber management and harvesting
operations, which include road construction and reforestation, as well as
wildlife and watershed management, all of which are carefully monitored using
the Company's GIS. See "Geographic Information System." The Company employs a
number of traditional and recently developed harvesting techniques on its lands
based on site-specific characteristics and other resource considerations. The
topography of the Timberlands allows over 95% of the Timberlands to be harvested
using lower-cost mechanical methods as opposed to higher-cost cable systems.

Harvesting on the Timberlands is conducted using both selective and
regeneration harvesting. In selective harvesting, a partial harvest provides
merchantable timber and opens up the stand for supplemental growth on the
remaining stand. Harvest entries are separated by approximately 5 to 15 years
and each entry is prescribed for volume to be removed, spacing to be provided,
and diameter limits to be harvested. In regeneration harvesting, which is used
to harvest approximately 60% of the Company's timber, all merchantable volume is
removed in a single harvest. After an area has been regeneration harvested, the
Company employs a reforestation contractor to plant two-year-old seedlings at an
optimal density of approximately 300 trees per acre. The Company also attempts
to protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest. For example, the Company typically leaves a mix of green
and dead trees at the harvest site, including some large trees, snags and downed
logs to provide habitats for a variety of wildlife species while enriching the
soil for successive generations of trees.

6

Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, weather, terrain, tree size, age and
stocking. The climate, site and soil conditions on the east side of the Cascade
Range, for example, permit management to harvest on an optimal rotation, or
harvest cycle, of 50 to 60 years. Forest stands are thinned periodically to
improve growth and stand quality until harvested. The Company actively utilizes
commercial thinning as a timber management practice. Pre-commercial thinning,
which occurs only in the Plantation stands, is utilized when the timber
harvested is not merchantable. The Company believes that such thinning improves
the overall productivity of the Timberlands by enhancing the growth of the
remaining trees. Occasionally, revenues are generated from pre-merchantable
thinning due to strong markets for wood chips.

The Company's policy is to ensure that every acre harvested is
reforested in order to enhance the long-term value of its timberlands. Based on
the geographic and climatic conditions of a given harvest site, harvested areas
may be regenerated naturally, by leaving mature trees to reseed the area, or
replanted with seedlings. Natural regeneration methods are widely used on
approximately 40% of the Company's harvested land. Approximately 27% of the
Timberlands acreage currently consist of Plantations. The Company expects to
convert an average of 14,000 acres of natural stands per year over the next
three years to Plantations. The seed orchard produces seed from trees selected
because they were the best genotype in their respective environments. During
2000, the Company planted approximately 1.7 million seedlings. Similar planting
levels are expected for 2001. The Company uses the seed collected from its
orchard (representing approximately 90% of seedlings planted) to grow trees with
desirable traits such as superior growth characteristics, good form and disease
resistance, resulting in greater wood volume over a rotation than that generated
by naturally regenerated seedlings. The seedlings are grown in the Company's
nursery, which uses seeds from the Company's seed orchard, which was established
by Weyerhaeuser in 1973.

Geographic Information System ("GIS")

The GIS is a computer software program that the Company acquired from
Weyerhaeuser as part of the Klamath Falls Acquisition. The GIS data, which has
been compiled over a period of at least five years, includes detailed
topographical field maps for every stand within the Timberlands including data
for the Ochoco Timberlands, setting forth the characteristics, including age,
species, size and other characteristics for the timber growing on each stand.
Using the data in the GIS, the Company can use a computer model to "grow" the
timber over time, enabling it to generate long-term harvest plans and to update
its inventory annually. To maintain the integrity of the data in the GIS, the
Company performs a detailed ground survey of the remaining timber inventory on a
tract after each harvest and updates the data in the GIS for that tract. With
the aid of the GIS, the Company is able to actively manage the Timberlands,
track its inventory and develop site-specific harvest plans on multiple scales,
adding additional layers of detail, such as the location of roadways or wildlife
nesting areas, as required. The GIS also permits the Company to analyze the
impact that new legislation may have on its Timberlands by inputting the
proposed constraints imposed by such legislation in light of the particular
field characteristics of its Timberlands. The Company believes the GIS may be
used to the Company's advantage to evaluate potential acquisition opportunities.

Federal and State Regulation

Endangered Species

The Federal Endangered Species Act and counterpart state legislation
protect species threatened with possible extinction. Protection of endangered
species may include restrictions on timber harvesting, road building and other
silvicultural activities in areas containing the affected species. A number of
species indigenous to the Pacific Northwest have been protected under the
Endangered Species Act, including the northern spotted owl, marbled murrelet,
Columbian white-tail deer, mountain caribou, grizzly bear, bald eagle and
various anadromous fish species. Currently, the Company has identified several
spotted owl and bald eagle nesting areas affecting the Timberlands and the
presence of bull trout in certain of its streams, which may affect harvesting on
approximately 26,000 acres.

The United States Fish and Wildlife Service (the "USFWS") listed the
American Bald Eagle in 1976 and the Northern Spotted Owl in 1990 as threatened
species throughout its range in Washington, Oregon and California. The Oregon
Forest Practices Act and related regulations also protect endangered species and
has specific provisions governing habitat protection for the spotted owl, the
bald eagle and other threatened species.

7

Based on the 2000 survey year, there were approximately 70 bald eagle
sites on the Klamath Falls Timberlands. The Company observes harvesting
restrictions around the eagle sites. Due in part to efforts of the Company and
its Predecessor, the bald eagle is expected to be removed from the endangered
species list in the near future.

In addition, the Company conducts surveys to determine the presence of
northern spotted owls. The surveys have been conducted every year in order to
(i) meet the regulatory requirements for timber harvest and other management
activities, (ii) monitor existing sites and determine the current status of such
sites, (iii) determine if areas identified as containing suitable habitat are
supporting owls and (iv) investigate other spotted owl or other species
sightings. The most recent of such surveys was completed in August 2000, and
identified approximately 31 northern spotted owl sites affecting the Klamath
Falls Timberlands, three of which are located on the Klamath Falls Timberlands.

The Company believes that it is managing its harvesting operations in
the areas affected by protected species in substantial compliance with
applicable federal and state regulations. Based on certain consultants' reports,
and on management's knowledge of the Timberlands, the Company does not believe
that there are any species protected under the Endangered Species Act or similar
state laws that, under current regulations and Court interpretation, would have
a material adverse effect on the Company's ability to harvest the Timberlands in
accordance with current harvest plans. There can be no assurance, however, that
species within the Timberlands may not subsequently receive protected status
under the Endangered Species Act or that currently protected species may not be
discovered in significant numbers within the Timberlands. Additionally, there
can be no assurance that future legislative, administrative or judicial
activities related to protected species will not adversely affect the Company or
its ability to continue its activities and operations as currently conducted.

Timberlands

The operation of the Timberlands is subject to specialized statutes and
regulations in the State of Oregon, which has enacted laws which regulate
forestry operations, including the Forest Practices Act, which addresses many
growing, harvesting and processing activities on forest lands. Among other
requirements, these laws restrict the size and spacing of regeneration harvest
units, and impose certain reforestation obligations on the owners of forest
lands. The State of Oregon requires a company to provide prior notification
before beginning harvesting activity. The Forest Practices Act and other state
laws and regulations control timber slash burning, operations during fire hazard
periods, logging activities which may affect water courses or in proximity to
certain ocean and inland shore lines, water protection and enhancement and
certain grading and road construction activities. The Company believes it is in
substantial compliance with these regulations.

Environmental Laws and Superfund

The Company's operations are subject to federal, state and local
environmental laws and regulations relating to the protection of the
environment. Although the Company believes that it is in material compliance
with these requirements, there can be no assurance that significant costs, civil
and criminal penalties, and liabilities will not be incurred, including those
relating to claims for damages to property or natural resources resulting from
the Company's operations.

Environmental laws and regulations have changed substantially and
rapidly over the last 20 years, and the Company anticipates there will be
continuing changes. The trend in environmental regulations is to place more
restrictions and limitations on activities that may affect the environment, such
as emissions of pollutants and the generation and disposal of wastes.
Increasingly strict environmental restrictions and limitations have resulted in
increased operating costs for the Company and it is possible that the costs of
compliance with environmental laws and regulations will continue to increase.

8

Access to Timberlands May be Limited by Federal Regulation

A substantial portion of the Timberlands consists of sections of land
that are intermingled with or adjacent to sections of federal land managed by
the USFS and the BLM. Removal of trees from those portions of the Timberlands
requires transportation of the logs by truck across logging and general purpose
roads. The Company has entered into road use agreements with the USFS and the
BLM. The majority of the Company's timberland management activities to include
the transportation of timber products across federal land and roads fall under
such agreements, which describe the Company's exclusive rights to transport
timber products across federal lands and roads without USFWS consultation. In
many cases, access is only, or most economically, achieved through a road or
roads built across adjacent federal land pursuant to a reciprocal right-of-way
("RROW"). Removal of federal timber often requires similar access across the
Timberlands. Recent litigation (not involving the Company) before the United
States Court of Appeals for the Ninth Circuit held that the BLM was not required
to consult with the USFWS, which administers the Endangered Species Act, prior
to approving a private landowner's proposal to build an access road across
federal land pursuant to an existing RROW entered into prior to the enactment of
the Endangered Species Act. A reversal on appeal or a rehearing of that case, or
future federal law or regulation requiring the BLM to consult with the USFWS in
connection with an RROW, could materially adversely affect the Company's ability
to harvest the affected portion of the Timberlands. Certain of the Company's
RROW agreements contain provisions that require compliance with state and
federal environmental laws and regulations. To the extent that the Company
acquires new Timberlands that require access through federal lands, the Company
may enter into new RROW agreements with the BLM or other federal agencies which
would require consultation with the USFWS. In addition, the BLM has published
advance notice of its intent to revise regulations governing RROW agreements
entered into the future to, among other things, expand the BLM's consideration
of environmental and cultural factors in granting, issuing or renewing
rights-of-way, provide the BLM with regulatory authority to object to the
location of roads because of potential effects on threatened or endangered
species and allow for the abandonment of rights-of-way under certain
circumstances.

Safety and Health

The operations of the Timberlands are subject to the requirements of
the Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes relating to the health and safety of employees. The Company believes
that it is in compliance with OSHA regulations, including general industry
standards, permissible exposure levels for toxic chemicals and record-keeping
requirements.

9

Employees

As of March 15, 2001, the Company had 29 salaried employees, including
employees of the General Partner that manage the business of the Company. The
employees are not unionized, and the Company believes that its employee
relations are good. All of the silvicultural activities on the Timberlands and
the harvesting and delivery of logs are conducted by independent contractors who
are not employees of the Company.

Item 2. Properties

Timber Inventory

The Company currently owns and manages approximately 553,000 fee acres
of timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 2001 to
be approximately 1.5 BBF in Oregon east of the Cascade Range. A merchantable
tree is a tree of sufficient size that will produce a sound log 16 feet in
length and at least 4.6 inches in diameter, inside bark, at the small end. The
Company's merchantable timber inventory consists of a substantial percentage of
premium species of softwood, consisting of Ponderosa Pine and Douglas fir,
species which have historically commanded premium prices over other softwood
species, as well as Lodgepole Pine, White Fir and other species. The Company
believes that the Timberlands are suitable for current operations.

The Timberlands have stands of varying sizes and ages and are unique in
the forests east of the Cascade Range in Oregon in that approximately 155,000
acres of the 553,000 acre total consist of actively managed pine Plantations
with stands ranging in age from one to 39 years. The Plantations are stocked
with high quality Ponderosa Pine (approximately 78%) and Lodgepole Pine
(approximately 22%). Initial thinning of the Plantation stands, including the
thinning of commercial quantities of merchantable timber, is expected to begin
within the next three years. See "The Timberlands--Harvest Plans."

Merchantable Timber Inventory by Species

The Company maintains data regarding the estimated merchantable timber
inventory by species within the Timberlands. All volumes are based on
information developed by Company personnel. As of January 1, 2001, the total
timber inventory amounted to 1.5 BBF. The Company's combined timber inventory by
MMBF and percentage is Ponderosa Pine (692.2 (47%)), Lodgepole Pine (253.2
(17%)), White Fir (286.3 (20%)), Douglas fir (181.6 (13%)) and other species
(47.2 (3%)). Other species include Cedar, Sugar Pine, Western Larch and Grand
Fir.

Size and Species Distribution of Merchantable Timber

The Company's Timberlands are diversified by species mix and, to a
lesser extent, by size distribution. Timber on the Timberlands generally reaches
merchantable size between 40 and 50 years in natural stands and between 25 and
35 years in the Plantations. The Company maintains data as to the estimated
volume distribution of merchantable timber on the Timberlands by species and by
diameter at breast-height ("DBH"). As of January 1, 2001, approximately 343
MMBF, or 23%, of the merchantable timber had a DBH of 16 or more inches.

Acreage Distribution by Age Class on Plantations

The Company also maintains data as to the acreage distribution of
timber on the Plantations by age class. As of January 1, 2001, the Plantations
totaled 155,000 acres. Of the total acreage, 62,000 acres range from 1 to 15
years of age, 73,000 acres range from 16 to 25 years of age, and 20,000 acres
are 26 years of age or older.

10

Item 3. Legal Proceedings

In November 2000, six purported class action lawsuits were filed
against the General Partner and the Board of Directors of the General Partner
(the "Board") alleging breach of fiduciary duty and self-dealing by the General
Partner and the Board in connection with an announcement on November 2, 2000
that a group led by senior management has begun the process to explore taking
the Company private (the "Going-Private Transaction").

All six lawsuits were filed in the Court of Chancery of the State of
Delaware for the County of New Castle. Each lawsuit was filed by a unitholder of
the Company, on behalf of all other unitholders of the Company who are similarly
situated, and seeks to have the class certified and the unitholder bringing the
lawsuit named as representative of the class. In addition, the lawsuits seek to
enjoin the Going-Private Transaction, to rescind the Going-Private Transaction
if it is consummated, and to recover damages and attorneys' fees. In addition to
naming the General Partner and the Board as defendants, all six lawsuits name
the Company as a defendant.

In the opinion of management, after consultation with outside counsel,
the pending lawsuits are not expected to have a material adverse effect on the
Company's financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of the Company's Unitholders
during the fourth quarter of 2000.

11

PART II

Item 5. Market for Registrant's Common Units and Related Security Holder Matters

The Common Units are listed and traded on the Nasdaq National Market
("Nasdaq") under the symbol "TIMBZ." The Common Units began trading on November
14, 1997, at an initial public offering price of $21.00 per Common Unit. As of
December 31, 2000, there were approximately 8,100 record holders of the
Company's Common Units and four record holders of the Company's Subordinated
Units. There is no established public trading market for the Company's
Subordinated Units.

The following table sets forth the high and low closing sales prices
for the Common Units on Nasdaq:

Common Unit Price Range
-----------------------

High Low
-----------------------

First Quarter 1998 $ 21.50 $ 20.31
Second Quarter 1998 21.88 18.00
Third Quarter 1998 19.50 14.88
Fourth Quarter 1998 18.25 13.00
First Quarter 1999 14.50 11.56
Second Quarter 1999 14.69 11.50
Third Quarter 1999 15.75 10.75
Fourth Quarter 1999 13.38 9.81
First Quarter 2000 11.38 9.50
Second Quarter 2000 10.56 9.56
Third Quarter 2000 11.38 9.63
Fourth Quarter 2000 10.75 5.38
First Quarter 2001 8.50* 6.50*

* First Quarter 2001 high/low is through March 7, 2001.

The last reported sale price of the Common Units on Nasdaq on March 7,
2001 was $ 8.00 per Common Unit.

Cash Distributions

The Company made its first cash distribution on the Common Units and
the Subordinated Units on May 15, 1998, of $0.73, representing the sum of $0.50,
the Minimum Quarterly Distribution for the first quarter of 1998, plus $0.23,
the pro rata portion of the Minimum Quarterly Distribution for the period from
November 19, 1997 through December 31, 1997. The Company made the Minimum
Quarterly Distributions of $0.50 per Unit for each subsequent quarter on August
14, 1998, November 13, 1998, February 12, 1999, May 14, 1999, August 13, 1999,
November 15, 1999, February 14, 2000, May 15, 2000, August 14, 2000, November
14, 2000 and February 14, 2001, respectively.

Cash Distribution Policy

General

The Company currently expects to distribute 98% of its Available Cash
(defined below) within 45 days after the end of each quarter to Unitholders of
record and 2% to the General Partner. During a specified period that will not
end earlier than December 31, 2002 (the "Subordination Period"), distributions
of Available Cash on Subordinated Units are subordinated to the rights of
holders of the Common Units to receive $0.50 per Common Unit per quarter, plus
any arrearages in the Minimum Quarterly Distribution.

12

Available Cash as defined in the Partnership Agreement generally means,
with respect to any quarter of the Company, all cash on hand at the end of such
quarter less the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the General Partner to (i) provide for the proper
conduct of the Company's business, (ii) comply with applicable law or any
Company debt instrument or other agreement, or (iii) provide funds for
distributions to Unitholders and the General Partner in respect of any one or
more of the next four quarters.

Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders relative to the General Partner, and under certain
circumstances it determines whether holders of Subordinated Units receive any
distributions.

Operating Surplus, as defined in the Partnership Agreement, refers
generally to (i) the cash balance of the Company on the date the Company
commences operations, plus $15.0 million, plus all cash receipts of the Company
from its operations since the closing of the Initial Public Offering and Public
Note Offering (hereafter the "Transactions"), less (ii) all Company operating
expenses, debt service payments (including reserves therefor but not including
payments required in connection with the sale of assets or any refinancing with
the proceeds of new indebtedness or an equity offering) and reserves established
for future Company operations, in each case since the closing of the
Transactions.

Capital Surplus as also defined in the Partnership Agreement will
generally be generated only by borrowings (other than for working capital
purposes), sales of debt and equity securities and sales or other dispositions
of assets for cash (other than inventory, accounts receivable and other assets
all as disposed of in the ordinary course of business and up to $50.0 million of
land sales).

To avoid the difficulty of trying to determine whether Available Cash
distributed by the Company is from Operating Surplus or from Capital Surplus,
all Available Cash distributed by the Company from any source will be treated as
distributed from Operating Surplus until the sum of all Available Cash
distributed since the commencement of the Company equals the Operating Surplus
as of the end of the quarter prior to such distribution. Any Available Cash in
excess of such amount (irrespective of its source) will be deemed to be from
Capital Surplus and distributed accordingly.

If Available Cash from Capital Surplus is distributed in respect of
each Common Unit in an aggregate amount per Common Unit equal to $21.00 (the
"Initial Unit Price"), plus any Common Unit Arrearages, the distinction between
Operating Surplus and Capital Surplus will cease, and all distributions of
Available Cash will be treated as if they were from Operating Surplus. The
Company does not anticipate that there will be significant distributions from
Capital Surplus.

The Subordinated Units are a separate class of interests in the
Company, and the rights of holders of such interests to participate in
distributions to partners differ from the rights of the holders of Common Units.
For any given quarter, any Available Cash will be distributed to the General
Partner and to the holders of Common Units, and may also be distributed to the
holders of Subordinated Units depending upon the amount of Available Cash for
the quarter, the amount of Common Unit Arrearages, if any, and other factors
discussed below.

The Incentive Distributions are nonvoting limited partner interests
that represent the right to receive an increasing percentage of quarterly
distributions of Available Cash from Operating Surplus after the Target
Distribution Levels have been achieved. The Target Distribution Levels are based
on the amounts of Available Cash from Operating Surplus distributed in excess of
the payments made with respect to the Minimum Quarterly Distribution and Common
Unit Arrearages, if any, and the related 2% distribution to the General Partner.

Distributions from Operating Surplus during Subordination Period

The Subordination Period will generally continue until the first day of
any quarter beginning after December 31, 2002 in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units and
the Subordinated Units with respect to each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the sum
of the Minimum Quarterly Distribution on all of the Common Units and
Subordinated Units during such periods, (ii) the Adjusted Operating Surplus
generated during each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units that
were outstanding during such period on a fully-diluted basis and the related
distribution on the general partner interest in the Company and the managing
member interest in the Operating Company, and (iii) there are no outstanding
Common Unit Arrearages.

13

Prior to the end of the Subordination Period, a portion of the
Subordinated Units will convert into Common Units on a one-for-one basis on the
first day after the record date established for the distribution in respect of
any quarter ending on or after (a) December 31, 2000 with respect to one-quarter
of the Subordinated Units (1,070,530 Subordinated Units), and (b) December 31,
2001 with respect to one-quarter of the Subordinated Units (1,070,530
Subordinated Units), in respect of which (i) distributions of Available Cash
from Operating Surplus on the Common Units and the Subordinated Units with
respect to each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus generated during each
of the two consecutive four-quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the
Common Units and Subordinated Units that were outstanding during such period on
a fully diluted basis and the related distribution on the general partner
interest in the Company and the managing member interest in the Operating
Company, and (iii) there are no outstanding Common Unit Arrearages; provided,
however, that the early conversion of the second one-quarter of Subordinated
Units may not occur until at least one year following the early conversion of
the first one-quarter of Subordinated Units. On February 6, 2001, 1,070,530
Subordinated Units converted to Common Units (See Note 15 to the Consolidated
Financial Statements).

Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate, pro rata, with the other Common Units in distributions of Available
Cash. In addition, if the General Partner is removed as the general partner of
the Company under circumstances where Cause (as defined in the Partnership
Agreement) does not exist and Units held by the General Partner and its
affiliates are not voted in favor of such removal, (i) the Subordination Period
will end and all outstanding Subordinated Units will immediately convert into
Common Units on a one-for-one basis, (ii) any existing Common Unit Arrearages
will be extinguished and (iii) the General Partner will have the right to
convert its general partner interest (and its right to receive Incentive
Distributions) into Common Units or to receive cash in exchange for such
interests.

"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (a) any net increase in working
capital borrowings during such period and (b) any net reduction in cash reserves
for Operating Expenditures during such period not relating to an Operating
Expenditure made during such period; and plus (x) any net decrease in working
capital borrowings during such period and (y) any net increase in cash reserves
for Operating Expenditures during such period required by any debt instrument
for the repayment of principal, interest or premium. Operating Surplus generated
during a period is equal to the difference between (i) the Operating Surplus
determined at the end of such period and (ii) the Operating Surplus determined
at the beginning of such period.

Distributions by the Company of Available Cash from Operating Surplus
with respect to any quarter during the Subordination Period will be made in the
following manner:

first, 98% to the Common Unitholders, pro rata, and 2% to the
General Partner, until there has been distributed in respect of each
outstanding Common Unit an amount equal to the Minimum Quarterly
Distribution for such quarter;

second, 98% to the Common Unitholders, pro rata, and 2% to the
General Partner, until there has been distributed in respect of each
outstanding Common Unit an amount equal to any Common Unit Arrearages
accrued and unpaid with respect to any prior quarters during the
Subordination Period;

third, 98% to the Subordinated Unitholders, pro rata, and 2% to
the General Partner, until there has been distributed in respect of
each outstanding Subordinated Unit an amount equal to the Minimum
Quarterly Distribution for such quarter; and thereafter, in the manner
described in "--Incentive Distributions" below.

Notwithstanding the foregoing, no distributions may be made on the
Subordinated Units with respect to any quarter if the Consolidated Fixed Charge
Coverage Ratio (as defined in the Partnership Agreement) for the four-quarter
period ended with such quarter is equal to or less than 1.75 to 1.00.

14

Incentive Distributions

For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to the
Minimum Quarterly Distribution on all Units and to the Common Unitholders in an
amount equal to any unpaid Common Unit Arrearages, then any additional Available
Cash from Operating Surplus in respect of such quarter will be distributed among
the Unitholders and the General Partner in the following manner:

first, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit
Arrearages) a total of $0.550 for such quarter in respect of each
outstanding Unit (the "First Target Distribution");

second, 85% to all Unitholders, pro rata, and 15% to the General
Partner, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit
Arrearages) a total of $0.633 for such quarter in respect of each
outstanding Unit (the "Second Target Distribution");

third, 75% to all Unitholders, pro rata, and 25% to the General
Partner, until the Unitholders have received (in addition to any
distributions to Common Unitholders to eliminate Common Unit
Arrearages) a total of $0.822 for such quarter in respect of each
outstanding Unit (the "Third Target Distribution"); and

thereafter, 50% to all Unitholders, pro rata, and 50% to the
General Partner.

The distributions to the General Partner set forth above that are in
excess of its aggregate 2% general partner interest represent the Incentive
Distributions. The right to receive Incentive Distributions is not part of the
general partner interest and may be transferred separately from such interest in
certain limited circumstances. See "--The Partnership Agreement--Transfer of
General Partner's Interests and Incentive Distribution Rights."

Adjustment of Minimum Quarterly Distribution and Target Distribution Levels

In addition to reductions of the Minimum Quarterly Distribution and
Target Distribution Levels made upon a distribution of Available Cash from
Capital Surplus, the Minimum Quarterly Distribution, the Target Distribution
Levels, the Unrecovered Capital, the number of additional Common Units issuable
during the Subordination Period without a Unitholder vote, the number of Common
Units issuable upon conversion of the Subordinated Units and other amounts
calculated on a per Unit basis will be proportionately adjusted upward or
downward, as appropriate, in the event of any combination or subdivision of
Common Units (whether effected by a distribution payable in Common Units or
otherwise), but not by reason of the issuance of additional Common Units for
cash or property. For example, in the event of a two-for-one split of the Common
Units (assuming no prior adjustments), the Minimum Quarterly Distribution, each
of the Target Distribution Levels and the Unrecovered Capital of the Common
Units would each be reduced to 50% of its initial level.

The Minimum Quarterly Distribution and the Target Distribution Levels
may also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Company to become taxable as a corporation or otherwise subjects the Company to
taxation as an entity for federal, state or local income tax purposes. In such
event, the Minimum Quarterly Distribution and the Target Distribution Levels
would be reduced to an amount equal to the product of (i) the Minimum Quarterly
Distribution and each of the Target Distribution Levels, respectively,
multiplied by (ii) one minus the sum of (x) the maximum effective federal income
tax rate to which the Company is then subject as an entity plus (y) any increase
that results from such legislation in the effective overall state and local
income tax rate to which the Company is subject as an entity for the taxable
year in which such event occurs (after taking into account the benefit of any
deduction allowable for federal income tax purposes with respect to the payment
of state and local income taxes). For example, assuming the Company was not
previously subject to state and local income tax, if the Company were to become
taxable as an entity for federal income tax purposes and the Company became
subject to a maximum marginal federal, and effective state and local, income tax
rate of 38%, then the Minimum Quarterly Distribution and the Target Distribution
Levels would each be reduced to 62% of the amount thereof immediately prior to
such adjustment.

15

Item 6. Selected Financial Data

U.S. Timberlands (1) Predecessor (1)
--------------------------------------------- --------------------------------
August 30, January 1,
1996 through 1996 through
December 31, August 29,
2000 1999 1998 1997 1996 1996

CASH FLOWS AND OTHER DATA
(IN MILLIONS):
Modified EBITDDA (7) . . . . . . . . . . . . . $ 49.3 $ 50.6 $ 44.2 $ 53.3 $ (1.4) $ 3.6
Additions to timber and timberlands (3) 2.3 1.0 0.6 111.6 283.6 0.5
Cash flow from (used in) operating
activities . . . . . . . . . . . . . . . . 28.9 25.5 18.5 26.3 (3.0) 5.5
Cash flow from (used in) investing
activities . . . . . . . . . . . . . . . . (2.3) (1.3) (0.6) (101.6) (291.5) (0.5)
Cash flow from (used in) financing
activities . . . . . . . . . . . . . . . . (26.2) (26.2) (23.7) 69.3 311.0 (5.1)
OPERATING STATEMENT DATA
(IN MILLIONS EXCEPT PER
UNIT AMOUNTS):
Revenues (2)(3) . . . . . . . . . . . . . . . 75.6 77.0 71.3 77.3 14.0 15.6
Depreciation, depletion and road
amortization (2)(3) . . . . . . . . . . . . 28.8 23.3 21.9 17.3 3.3 0.9
Cost of timber and property sales (2)(3) 2.6 -- 5.9 8.7 -- --
Operating income (loss) (2)(3) . . . . . . . . 17.9 27.2 16.3 27.3 (4.8) 2.7
Income (loss) before extraordinary
items (4) . . . . . . . . . . . . . . . . (4.1) 6.4 (6.4) (1.4) (13.0) 2.7
Extraordinary items, losses on
extinguishment of debt (5) . . . . . . . . -- -- -- (9.3) -- --
Income (loss) before general partner
and minority interest . . . . . . . . . . . (4.1) 6.4 (6.4) (10.7) (13.0) 2.7

PER UNIT DATA (6):
Basic income (loss) before
extraordinary items per unit:
Common . . . . . . . . . . . . . . . . . . (0.31) 0.48 (0.49) 3.05 -- --
Subordinated . . . . . . . . . . . . . . . (0.31) 0.48 (0.49) (1.01) (3.04) --
Basic net income (loss) per unit:
Common . . . . . . . . . . . . . . . . . . (0.31) 0.48 (0.49) (0.86) -- --
Subordinated . . . . . . . . . . . . . . . (0.31) 0.48 (0.49) (2.30) (3.04) --

BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital . . . . . . . . . . . . . . . 2.0 2.4 1.4 1.8 21.5 0.5
Total assets (3) . . . . . . . . . . . . . . . 300.9 327.7 350.7 385.2 310.2 27.8
Long-term debt (8) . . . . . . . . . . . . . . 225.0 225.0 225.0 225.0 305.0 --
Equity (deficit) (9) . . . . . . . . . . . . . 67.1 97.2 116.9 145.6 (2.9) 27.8

OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
volumes (MMBF) (2)(3) . . . . . . . . . . . 243.7 187.3 144.5 138.9 30.2 32.8
Property sales volumes (MMBF) (2) . . . . 13.6 -- 26.6 41.5 -- --

16

(1) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial
and operating data after August 30, 1996 are not comparable to
financial and operating data of the Predecessor. In 1996, USTK and Old
Services were formed and subsequently entered into the agreement to
consummate the Weyerhaeuser Acquisition. As legal entities, USTK and
Old Services were not consolidated. However, due to common ownership
and management, the financial statements of USTK and Old Services prior
to the Transactions have been presented on a combined basis.
(2) Revenues in 2000 consist of $72.3 million of log, stumpage and deed
sales, $2.8 million of timber and property sales and $0.5 million of
by-products and other sales. Revenues in 1999 consist of $76.6 million
of log, stumpage and deed sales and $0.4 million of by-products and
other sales. Revenues in 1998 consist of $63.6 million of log and
stumpage sales, $6.3 million of timber and property sales and $1.4
million of by-products and other sales. Revenues in 1997 consist of
$60.4 million of log and stumpage sales, $15.2 million of timber and
property sales and $1.7 million of by-products and other sales.
Revenues prior to 1997 consist primarily of log sales. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(3) In July 1997, the Company acquired the Ochoco Timberlands for $110
million from Ochoco Lumber Company. In August 1996, the Company
acquired the Klamath Falls Timberlands for $283.5 million from
Weyerhaeuser.
(4) See effect of interest expense and amortization of deferred financing
fees and debt guarantee fees in "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(5) On July 14, 1997 the Company retired certain borrowings under the
Operating Company's then existing revolving credit facility term loan
which resulted in an extraordinary loss on extingjuishment of debt of
$3.6 million. Additionally, in conjunction with the issuance of the
Notes, the Company retired all existing debt under certain pre-existing
long-term financing arrangements resulting in an extraordinary loss on
extinguishment of debt of $5.7 million. Such extraordinary losses were
due principally to the write-off of existing unamortized deferred
financing fees.
(6) No per unit information is presented for period ended August 29, 1996
as the Predecessor had a different ownership structure and any per unit
information would not be relevant or meaningful to the user of the
selected financial data. See discussion of per unit information in Note
1 of the Notes to Consolidated Financial Statements.
(7) Modified EBITDDA is defined as operating income plus depreciation,
depletion, and road amortization and cost of timber and property sales.
Modified EBITDDA should not be considered as an alternative to net
income, operating income, cash flows from operating activities or any
other measure of financial performance presented in accordance with
generally accepted accounting principles. Modified EBITDDA is not
intended to represent cash flow and does not represent the measure of
cash available for distribution, but provides additional information
for evaluating the Company's ability to make the Minimum Quarterly
Distribution. In addition, Modified EBITDDA does not necessarily
represent funds available for management's discretionary use as it is
calculated prior to debt service obligations and capital expenditures.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(8) See discussion of long-term debt at Note 7 of the Notes to Consolidated
Financial Statements.
(9) The Weyerhaeuser Acquisition in August of 1996 was accounted for as a
purchase. Therefore, the financial statements as of and for the periods
ending prior to the date of the Weyerhaeuser Acquisition are accounted
for under the pre-Weyerhaeuser Acquisition basis of accounting. Because
the Klamath Timberlands did not legally exist as a stand-alone entity,
there are no separate meaningful equity accounts of the Predecessor
prior to the Weyerhaeuser Acquisition.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Forward-Looking Statements

Certain information contained in this report may constitute
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Forward-looking information is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. Such risks, trends and
uncertainties include the highly cyclical nature of the forest products
industry, general economic conditions, competition, price conditions or trends
for the Company's products, the possibility that timber supply could be affected
if governmental, environmental or endangered species policies change, and
limitations on the Company's ability to harvest its timber due to adverse
natural conditions or increased governmental restrictions. The results of the
Company's operations and its ability to pay quarterly distributions to its
Unitholders depend upon a number of factors, many of which are beyond its
control. These factors include general economic and industry conditions,
domestic and export prices, supply and demand for logs, seasonality, government
regulations affecting the manner in which timber may be harvested, and
competition from other supplying regions and substitute products. These and
other risks are described in the Company's other reports and registration
statements, which are available from the United States Securities and Exchange
Commission.

17

General

The Company's primary business is the growing and harvesting of timber
(see Item 1. Business).

The Company's results of operations are affected by various factors,
many of which are beyond its control, including general industry conditions,
domestic and international prices and supply and demand for logs, lumber and
other wood products, seasonality and competition from other domestic and
international supplying regions and substitute products.

Supply and Demand Factors

Supply

The supply of logs available for purchase has been most affected in
recent years by significant reductions in timber harvested from public
timberlands, principally as a result of efforts to preserve the habitat of
certain endangered species, as well as a change in the emphasis of government
policy toward habitat preservation, conservation and recreation and away from
timber management. Since the early 1970s, environmental and other similar
concerns and governmental policies have substantially reduced the volume of
timber under contract to be harvested from public lands. The pace of regulatory
activity accelerated in the late 1980s. The resulting supply decrease caused
prices for logs to increase significantly, reaching peak levels during 1993. The
low supply of timber from public lands, which is expected to continue for the
foreseeable future, has benefited private timber holders such as the Company
through higher stumpage and log prices. Certain market conditions for finished
products, however, have negatively impacted stumpage and log prices in 2000.

Industry participants do not expect environmental restrictions to ease
materially within any reasonable planning horizon. Consequently, many producers
of lumber and wood products are attempting to adapt to the new supply
environment by increasing their emphasis on raw material yields, entering into
long term timber supply arrangements and value added manufacturing, and
accessing previously untapped supplies (such as private wood lot owners, timber
with difficult access, alternative species and imports). These factors have
tended to restrict prices from significant increases. While raw material supply
is expected to be an ongoing challenge for the lumber and wood products
industry, such conditions would likely be favorable for timber owners such as
the Company.

In response to an increase in timber prices in the early 1990s, imports
of logs and lumber from abroad (from countries such as Canada and New Zealand)
increased. These imports, however, only partially offset the lost volume of
timber from public timberlands and did not replace the mature, high-quality
timber found in greater quantities on public timberlands. Imports are likely to
continue to increase over the next few years and could significantly affect the
raw material supplies in the domestic lumber and wood products industry.

Demand

Changes in general economic and demographic factors, including the
strength of the economy, unemployment rates and interest rates for home
mortgages and construction loans, have historically caused fluctuations in
housing starts and, in turn, demand and prices for lumber and commodity wood
products. United States housing starts for 2000 were down significantly from
1999 levels. Because of the growth of the home center distribution business, the
repair and remodeling markets have become a significant factor in terms of the
demand for lumber and commodity wood products and have dampened the wide
fluctuations that occurred when new housing starts were the primary factor. A
large portion of the Company's property consists of Pine species, which are used
in the finishing market, for molding trim, doors and windows. This market is
more affected by repair and remodeling than new housing construction. Prices for
these species, primarily Ponderosa Pine, reached a peak in the spring of 1993
and as a result attracted imports of Radiata Pine from New Zealand and Chile.
Given the strong, growing economy of the past several years, domestic markets
have been able to absorb the increasing quantities of imported Radiata pine
lumber. With the current slowing of our domestic economy, decreasing demand for
repair and remodeling markets and over supply of finished products in the
industry, the level of imports could have a negative impact on pricing for Pine
lumber. The demand for logs in the United States is also affected by the level
of lumber imports. In response to increasing lumber imports from Canada, the
United States and Canada signed an agreement in 1996 which restricted the
availability of Canadian softwood lumber in the United States. The Company
believes that this agreement, which expires on March 31, 2001, has not had a
material impact on the price or demand for logs in the United States although
its long-term effect, as well as the effect of its termination, is uncertain.

18

Due to transportation costs, domestic conversion facilities in the
Pacific Northwest tend to purchase raw materials within relatively confined
geographic areas, generally within a 200-mile radius. The conversion facilities
in the vicinity of the Timberlands need more wood supply to run at capacity than
can be produced by nearby timberlands. As a result, the demand from this region
is relatively steady, although prices fluctuate with market conditions.

Current Market Conditions

Log prices in the Northwest drastically declined during 2000 as compared
to 1999 due to the slowing United States economy and supply and demand factors.

During 2000, the United States economy began experiencing an economic
slow-down. Mortgage interest rates were climbing to levels significantly higher
than those experienced over the past few years and as such created weakening
conditions for new home construction, home repair and remodeling, and industrial
and other construction, which weakened the demand for finished lumber and
plywood products. As a result of the decreased demand and excess production
capacity within the industry the markets for finished lumber and plywood
products dropped to their lowest levels in the last ten years. As a result of
the weakening in the finished products markets, the prices being realized for
the Company's logs and timber declined significantly from 1999 levels. Prices
for the Company's logs and stumpage are also at or near ten year lows.

Prices for the fourth quarter of 2000 remained weak continuing a trend
started near the end of the second quarter. For the fourth quarter of 2000, the
Company's average delivered log prices for Ponderosa Pine, Douglas Fir,
Lodgepole Pine, and White Fir were down approximately 16%, 8%, 17%, and 10%,
respectively, from the same period in 1999.

The excess production levels of 2000 are expected to continue into the
first half of 2001, reducing the chances of a near-term recovery of wood product
prices. In addition, the impact of the expiration of the agreement between
Canada and United States limiting the Canadians lumber imports into the United
States through March 31, 2001 is yet to be determined and could add to the over
supply of finished wood products. As a result of the above conditions, the
Company does not expect a significant increase in prices during 2001.

19

Results of Operations

The following table sets forth sales volume for each of 2000, 1999 and
1998 from the sale of logs, stumpage and timber deeds by thousand board feet
("MBF") and price per thousand board feet and the sales of property.

Sales Volume (MBF) Price Realization (MBF)
------------------------------------- --------------------------------------
Timber Timber Timberland
Period Logs Stumpage Deeds Logs Stumpage Deeds Sales ($000)
------ ---- -------- ----- ---- -------- ----- ------------

2000
Year ended 12/31 96,112 503 147,083 $ 393 $ 379 $ 246 $ 2,773
4th Quarter 38,922 -- 57,844 $ 382 -- $ 174 $ 2,773
3rd Quarter 22,718 -- 29,501 $ 372 -- $ 189 --
2nd Quarter 13,908 -- 51,037 $ 432 -- $ 346 --
1st Quarter 20,564 503 8,701 $ 425 $ 379 $ 325 --

1999
Year ended 12/31 97,170 3,645 86,463 $ 436 $ 419 $ 379 --
4th Quarter 30,790 980 16,209 $ 432 $ 391 $ 351 --
3rd Quarter 39,008 744 25,597 $ 444 $ 404 $ 334 --
2nd Quarter 15,376 -- 26,898 $ 455 -- $ 484 --
1st Quarter 11,996 1,921 17,759 $ 395 $ 440 $ 308 --

1998
Year ended 12/31 93,557 50,894 -- $ 420 $ 479 -- $ 6,275
4th Quarter 24,299 23,787 -- $ 396 $ 441 -- --
3rd Quarter 29,017 22,617 -- $ 431 $ 511 -- --
2nd Quarter 23,832 2,506 -- $ 432 $ 570 -- $ 6,275
1st Quarter 16,409 1,984 -- $ 418 $ 447 -- --

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenues. Revenues decreased $1.4 million, or 1.8%, from $77.0 million
in 1999 to $75.6 million in 2000. The decrease is primarily attributable to a
decrease in log sales of $4.5 million and a $1.3 million decrease in stumpage
sales, partially offset by a $1.5 million increase in timber deed sales and the
fact that the Company had a $2.8 million dollar timber and property sale in
2000. To meet its working capital requirements, the Company harvested and sold
logs and stumpage in 2000 at rates in excess of both 1999 levels and the
estimated current annual board footage growth on the Timberlands.

Log sales for 2000 were $37.8 million on volumes of 96,112 MBF,
compared to log sales of $42.3 million on volumes of 97,170 in 1999. The average
log sales price for 2000 was $393 compared to an average log sales price of $436
in 1999, a 9.9% decrease, reflecting weaker markets for the Company's log sales.

20

Timber deed sales for 2000 were $34.3 million on volumes of 147,083
MBF, compared to timber deed revenue of $32.8 million on volumes of 86,463 MBF
in 1999. The average timber deed sales price per MBF for 2000 was $246 compared
to an average timber deed sales price of $379 in 1999, a 35.1% decrease. The
significant decrease in timber deed sales realization is due to overall declines
in market conditions as well as a reduction in the quality of the timber mix
being sold in timber sales. During 2000 there were less timber deed sales
containing larger, old growth timber which commands a premium, than in 1999. In
addition the Company's timber deed sales in the second quarter represented
substantially all of the remaining old growth timber on the Ochoco Timberlands
and was of a lower grade species mix than sales of timber on the Ochoco
Timberlands in previous years.

Stumpage sales for 2000 were $0.2 million on volumes of 503 MBF,
compared with stumpage sales of $1.5 million on volumes of 3,645 MBF in 1999.
The reduction in stumpage volumes is a result of the Company's strategic
decision to utilize log sales and timber deed sales as its primary source of
revenue.

The Company had $2.8 million in revenue from planned timber and
property sales in 2000 compared to no revenue from timber and property sales
during 1999.

Gross Profit. Gross profit decreased $12.3 million from $36.6 million
in 1999 to $24.3 million in 2000 and gross margin decreased from 47.6% in 1999
to 32.1% in 2000. The decrease in gross margin was primarily from three factors.
First, contracted log and haul costs on a per MBF basis were approximately 20%
higher during 2000 as compared to 1999 due to longer hauls for delivered logs
and higher fuel costs. Second, the Company's timber deed sales were composed of
a lower value grade mix as compared to 1999. Finally continued declines in the
timber markets have resulted in lower realizations on delivered log and stumpage
values.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $8.4 million in 2000, consistent with selling,
general and administrative expenses of $8.5 million in 1999. Within selling,
general and administrative expenses salaries and wages were up $0.3 million and
professional services were up $0.5 million over 1999. Those increases were
offset by a settlement with previous employees of $0.7 million in 1999.

Equity in Net Income (Loss) of Affiliate. The equity in net income of
affiliate was $2.0 million during 2000 as compared to equity in net loss of
affiliate of $0.9 million in 1999. The income in 2000 reflects the recapture of
$0.6 million in losses absorbed from its preferred investment in U.S.
Timberlands Yakima, LLC, and the Company's accrued return of $1.4 million on its
preferred investment. During 1999, the Company absorbed $0.3 million in losses
on its common investment in U.S. Timberlands Yakima, LLC and $0.6 million in
losses absorbed by its preferred investment in U.S. Timberlands Yakima, LLC. See
"Investment in Affiliate" included in Note 9 of the Financial Statements for
explanation of the preferred and common investments in U.S. Timberlands Yakima,
LLC.

Interest Expense. Interest expense was $21.9 million in 2000 and 1999
consisting primarily of interest expense on the Company's $225.0 million of
Senior Notes.

Other Income (Expense), net. Other income, net, was $0.2 million for
2000, compared to $1.1 million for 1999, representing a decrease in income of
$0.9 million. The decrease is primarily attributable to a mark-to-market gain on
an interest rate collar of approximately $1.0 million during 1999 and no such
gains in 2000.

Cash Flow From Operations. During 2000, cash flow from operations
increased $3.4 million or 13.3% over 1999 primarily because of a $10.4
million decrease in net income, which was more than offset by the addback of
non-cash items and changes in assets and liabilities.

Partners' Capital

During 2000 the limited partner interest in the Company declined $29.8
million from $96.2 million to $66.4 million. This decline was the result of
distributions to Unitholders of $25.8 million during 2000 as well as the limited
partners' share of the Company's net loss of $4.0 million in 2000. The General
Partner interest in the Company also declined during 2000 reflecting its share
of the Company's distributions and net loss for 2000. The Company anticipates
that partners' capital will continue to decline given current operating
conditions.

21

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Revenues. Revenues increased $5.7 million, or 8.0%, from $71.3 million
in 1998 to $77.0 million in 1999. The increase is primarily attributable to an
increase in timber deed sales of $32.8 million and a $3.0 million increase in
log sales, partially offset by a $22.8 million reduction in stumpage sales, a
$1.0 million decrease in by-products and other revenues and the fact that the
Company had no land sales in 1999 compared to approximately $6.3 million in land
sales in 1998. To meet its working capital requirements, the Company harvested
and sold logs and stumpage in 1999 at rates in excess of both 1998 levels and
the estimated current annual board footage growth on the Timberlands.
Timber deed sales for 1999 were $32.8 million on volumes of 86,463 MBF,
compared to no timber deed revenue for 1998.

Log sales for 1999 were $42.3 million on volumes of 97,170 MBF,
compared to log sales of $39.3 million on volumes of 93,557 MBF in 1998. The
average log sales price per MBF for 1999 was $436 compared to an average log
sales price per MBF of $420 for 1998, a 3.8% increase, reflecting stronger
markets, primarily for White Fir and Douglas Fir logs.

Stumpage sales for 1999 were $1.5 million on volumes of 3,645 MBF,
compared with stumpage sales of $24.4 million on volumes of 50,894 MBF in 1998.
The average stumpage sales price per MBF for 1999 was $419 compared to an
average stumpage sales price per MBF of $479 for 1998, a 12.5% reduction. The
decrease in average stumpage sales prices from 1998 to 1999 was primarily due to
a reduction in the grade of timber harvested from the Ochoco Timberlands. The
overall reduction in stumpage sales volume is due to the increased use of timber
deed sales in 1999.

The Company had no revenue from timber and property sales during 1999
as compared to approximately $6.3 million in planned timber and property sales
during 1998.

Gross Profit. Gross profit increased by $9.8 million from $26.8 million
in 1998 to $36.6 million in 1999 and gross margin increased from 37.6% in 1998
to 47.6% in 1999. The increase in gross margin was primarily from three factors.
First, the Company's normal annual review of its standing timber inventory and
depletion rate during the first quarter of 1999 resulted in a reduction of the
Company's depletion rate, and a savings of approximately $4.9 million in 1999.
Also, the Company did not have any land sales during 1999, which have typically
resulted in lower margins than log, stumpage and deed sales. In addition to the
above items, the Company benefited from an overall increase in log prices during
1999.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $2.0 million from $10.5 million in 1998 to
$8.5 million in 1999. This expense also decreased as a percentage of net sales
from 14.7% in 1998 to 11.0% in 1999. The decrease was primarily attributable to
one-time expenses of $1.7 million related to severance costs and the repurchase
of member interests in the General Partner that were incurred during the first
and fourth quarters of 1998, combined with the provision in 1998 for the closure
of the Seattle office.

Interest Expense. Interest expense for 1999 was $21.9 million as
compared to $22.2 million for 1998, representing a $0.3 million or 1.4%
reduction. Interest expense for both 1999 and 1998 was incurred primarily on the
$225.0 million of Notes issued in the November 1997 Public Note Offering. The
slight decrease in interest expense in 1999 can be attributed to a reduced level
of borrowing against the available revolving credit facilities during 1999 as
compared to 1998.

Interest Income. Interest income for 1999 was $0.6 million, an increase
of $0.1 million or 20.0% from interest income for 1998 of $0.5 million. The
increase is primarily attributable to imputed interest from deed sales with a
term of more than one year. Imputed interest income from deed sales was
approximately $0.3 million in 1999. The increase in interest from timber deed
sales was partially offset by a reduction in other interest income due to a
decrease in cash and cash equivalents available in 1999 compared to 1998.

22

Other Income (Expense), net. Other income, net, was $1.1 million for
1999 compared to other expense, net, of $0.3 million for 1998, representing an
increase to income of $1.4 million. The increase is primarily attributable to a
mark-to-market gain on an interest rate collar of approximately $1.0 million
during 1999. In addition, revenues from land use management operations such as
grazing permits increased in 1999.

Cash Flow From Operations. During 1999, cash flow from operations
increased $7.0 million or 37.8% primarily as a result of increased gross margins
and a reduction of selling, general and administrative expenses, offset
partially by decreased proceeds from timber and property sales, increase in
balance of notes receivable and a decrease in accrued liabilities.

Partners' Capital

During 1999 the limited partners' interest in the Company declined
$19.5 million from $115.7 million to $96.2 million. This decline was the result
of distributions to Unitholders of $25.7 million during 1999 partially offset by
the limited partners' share of the Company's net income of $6.2 million in 1999.
The General Partner interest in the Company also declined during 1999 reflecting
its share of the Company's distributions and net income for 1999.

Liquidity and Capital Resources

The Company's primary sources of liquidity have been cash provided by
operating activities as well as debt and equity financings. As of December 31,
2000 the Company had a cash balance of $3.2 million and had $2.0 million of
working capital.

Operating Activities. Cash flows provided by operating activities in
2000 were $28.9 million, compared to cash flows provided by operating activities
of $25.5 million in 1999. The $3.4 million increase in cash flows provided by
operating activities was primarily attributable to a $10.4 million decrease in
net income which was more than offset by the addback of non-cash operating items
and the changes in assets and liabilities.

Investing Activities. Cash flows used in investing activities were $2.3
million in 2000, as compared to cash flows used in investing activities of $1.3
million during 1999. The increase is primarily attributable to a purchase of
cutting rights in June 2000 for approximately $1.3 million, partially offset by
the Company's $0.3 million investment in affiliate in 1999.

Financing Activities. Cash flows used in financing activities were
$26.2 million in 1999 and 2000. During 1999 and 2000, the Company paid $26.2
million in distributions to Unitholders, General Partner and minority interest.

23

Notes

On November 14, 1997, the Operating Company issued $225.0 million
aggregate principal amount of Notes (the "Notes") representing unsecured general
obligations of the Operating Company which bear interest at 9 5/8% per annum,
payable semiannually in arrears on May 15 and November 15. The Notes mature on
November 15, 2007 unless previously redeemed. The Notes will not require any
mandatory redemption or sinking fund payments prior to maturity and are
redeemable at the option of the Operating Company in whole or in part, on or
after November 15, 2002 at predetermined redemption prices plus accrued interest
to the redemption date. Upon the occurrence of certain events constituting a
"change of control" (as defined in the Indenture), the Company must offer to
purchase the Notes, at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase. There can be
no assurance that the Company will have access to sufficient funds to repurchase
the Notes in the event of a change in control.

The indenture governing the Notes (the "Indenture") contains various
affirmative and restrictive covenants applicable to the Operating Company and
its subsidiaries, including limitations on the ability of the Operating Company
and its subsidiaries to, among other things, (i) incur additional indebtedness
(other than certain permitted indebtedness) unless the Operating Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is
greater than 2.25 to 1.00, and (ii) make distributions to the Company, make
investments (other than permitted investments) in any person, create liens,
engage in transactions with affiliates, suffer to exist any restrictions on the
ability of a subsidiary to make distributions or repay indebtedness to the
Company, engage in sale and leaseback transactions, enter into a merger,
consolidation or sale of all or substantially all of its assets, sell assets or
harvest timber in excess of certain limitations or engage in a different line of
business. Under the Indenture, the Operating Company will be permitted to make
cash distributions to the Company so long as no default or event of default
exists or would exist upon making such distribution (a) if the Operating
Company's Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture)
is greater than 1.75 to 1.00, in an amount, in any quarter, equal to Available
Cash (as defined in the Indenture) for the immediately preceding fiscal quarter
or (b) if the Operating Company's Consolidated Fixed Charge Coverage Ratio is
equal to or less than 1.75 to 1.00, in an aggregate amount not to exceed (i)
$7.5 million less the aggregate of all restricted payments made under this
clause (b)(i) during the immediately preceding 16 fiscal quarters (or shorter
period, if applicable, beginning on the issue date of the Notes), plus (ii) the
net proceeds of certain capital contributions (including the sale of Units)
received by the Company. The Company was in compliance with these covenants at
December 31, 2000 and 1999.

Affiliate Credit Facility

During the second quarter of 2000, the Company renewed its existing
credit agreement with an affiliate of the General Partner ("Affiliate Credit
Facility"). The Affiliate Credit Facility allows the Company to borrow up to
$12.0 million under certain terms and covenants. The covenants include
restrictions on the Company's ability to make cash distributions, incur certain
additional indebtedness or incur certain liens. In addition, the Company is
required to maintain certain financial ratios. The Affiliate Credit Facility
will expire on June 30, 2001. At that time, amounts borrowed will be due and
payable. As of December 31, 2000 there were no outstanding borrowings under the
Affiliate Credit Facility. The Company's intent is to replace the Affiliate
Credit Facility with a bank facility during 2001. The Company also has the
ability to generate cash flow through the acceleration of planned log and timber
deed sales. In addition, the Company's intent is to use new funds raised through
investment and commercial banks for acquisitions, if any, although there can be
no assurance that such financing will be available on terms acceptable to the
Company.

Under the Affiliate Credit Facility, so long as no Event of Default (as
defined in the Affiliate Credit Facility) exists or would result, the Operating
Company will be permitted to make quarterly cash distributions to the Company in
an amount not to exceed Available Cash (as defined in the Affiliate Credit
Facility) in the preceding quarterly period.

24

Capital Expenditures/Cash Distributions

Capital expenditures in 2000 totaled $2.3 million. The Company
purchased timber cutting rights for approximately 4.2 MMBF of timber for $1.3
million. The remaining $1.0 million in capital expenditures incurred were mainly
in the nature of land management/silvicultural costs, miscellaneous equipment
and computer hardware. Capital expenditures were financed through cash flow
generated by operations. As the Company does not currently own and does not plan
to own manufacturing facilities, and all logging is subcontracted to third
parties, it is anticipated that capital expenditures in the future will not be
significant and will consist mainly of land management/silvicultural
expenditures. It is currently anticipated that the Company will not maintain
significant log inventories, although small log inventories may be maintained
for a short period of time, or incur material capital expenditures for machinery
and equipment. The Company anticipates that capital expenditures will be
approximately $1.5 million in 2001. Capital expenditures will consist primarily
of capitalized silvicultural costs and miscellaneous equipment purchases.

Cash required to meet the Company's debt service and the quarterly cash
distributions will be significant. To meet its working capital requirements, the
Company has been selling logs and making timber sales at a rate in excess of the
General Partner's estimate of the current annual board footage growth on the
Company's timberlands. The debt service and quarterly cash distributions have
been funded from operations and borrowings. Given projected volumes for sales of
logs and timber, estimated current board footage growth on the timberlands and
the harvest restrictions in the Notes, unless prices improve, costs are reduced,
new markets are developed or the Company makes accretive acquisitions, the
Company's ability in the future to make distributions at current levels will be
adversely affected. The Company continues to evaluate means to improve cash
flows, including the factors mentioned above. There can be no assurance that
prices will improve or that the Company will be able to take any of these
actions and it is unlikely prices will improve or any of these actions will take
effect within a short-term horizon.

Effects of Inflation

Prices for the Company's stumpage and logs may be subject to sharp
cyclical fluctuations due to market or other economic conditions, including the
level of construction activity but generally do not directly follow inflationary
trends. Costs of forest operations and general and administrative expenses
generally reflect inflationary trends.

Recent Developments

In November 2000, the Company announced that an independent committee of
the board of directors had been formed to evaluate management proposals to take
the Company private. The independent committee has retained separate legal
counsel and intends to retain financial advisors to assist in this process. To
date, a proposal from management has not been received.

New Accounting Standard - SFAS No. 133

In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which as amended, is required to
be adopted for fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS 133 requires the Company to recognize all derivatives in the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is a hedge, depending upon the nature of the
hedge, changes in fair value of the derivative will either be offset against the
changes in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Although the Company
had no outstanding derivative positions at December 31, 2000, it will absorb a
loss of approximately $74 from its allocable share of the cumulative effect of
adoption of SFAS 133 by its equity basis investee, U.S. Timberlands Yakima, LLC,
to reduce the carrying value of an interest rate cap agreement to its fair
value.

25

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 8. Financial Statements

The information required hereunder is included in this report as set
forth in the "Index to Financial Statements" on Page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

The General Partner manages and operates the activities of the Company.
As is commonly the case with publicly traded limited partnerships, the Company
does not directly employ any of the persons responsible for managing or
operating the Company. In general, the management of the General Partner manages
and operates the Company's business as officers and employees of the General
Partner and its affiliates. The Unitholders do not directly or indirectly
participate in the management or operation of the Company.

In January 1999, the General Partner appointed William A. Wyman and
Alan B. Abramson, two members of the General Partner's Board of Directors who
are neither officers, employees or security holders of the General Partner nor
directors, officers, or employees of any affiliate of the General Partner, to
serve on the General Partner's Conflicts Committee. The Conflicts Committee has
the authority to review specific matters as to which the Board of Directors
believes there may be a conflict of interest in order to determine if the
resolution of such conflict proposed by the General Partner is fair and
reasonable to the Company. Any matters approved by the Conflicts Committee will
be conclusively deemed to be fair and reasonable to the Company, approved by all
partners of the Company and not a breach by the General Partner or its Board of
Directors of any duties they may owe the Company or the Unitholders. The Board
of Directors also has an audit committee (the "Audit Committee") composed of the
two independent directors as well as George R. Hornig, which reviews the
external financial reporting of the Company, recommends engagement of the
Company's independent public accountants and reviews the Company's procedures
for internal auditing and the adequacy of the Company's internal accounting
controls. The Board of Directors also has a compensation committee (the
"Compensation Committee"), consisting of five directors, including the two
independent directors, which determines the compensation of the officers of the
General Partner and administers its employee benefit plans. In addition, the
Board of Directors has a Long-Term Incentive Plan Committee (the "LTIP
Committee"), which consists of four directors, including the two independent
directors, which acts with respect to the Company's Long-Term Incentive Plan.

26

Directors, Executive Officers and Key Employees of the General Partner

The following table sets forth certain information with respect to the
members of the Board of Directors of the General Partner, its executive officers
and certain key employees. Executive officers and directors are elected for
one-year terms.

Name Age Position with General Partner
---- --- -----------------------------

John M. Rudey 57 Chairman, Chief Executive Officer, President and Director (1)

Aubrey L. Cole 77 Director (2)

George R. Hornig 46 Director (3)

William A. Wyman 62 Director (4)

Alan B. Abramson 55 Director (5)

Robert F. Wright 75 Director (6)

Thomas C. Ludlow 54 Vice President and Chief Financial Officer

Martin Lugus 60 Vice President, Timberland Operations

Toby A. Luther 27 Assistant Vice President, Corporate Controller - Western Operations

Walter L. Barnes 58 Assistant Vice President, Harvesting

Robert A. Broadhead 49 Assistant Vice President, Marketing

Jay Jeffrey Vermilya 44 Assistant Vice President, Planning

Christopher J. Sokol 51 Assistant Vice President, Forestry

(1) Member of the Executive (Chairman), Nominating (Chairman), Finance and
Compensation Committees.

(2) Member of the Compensation and LTIP Committees.

(3) Member of the Executive, Audit, Finance (Chairman) and Compensation
Committees.

(4) Member of the Audit (Chairman), Conflicts (Chairman), Compensation and
LTIP Committees.

(5) Member of the Audit, Conflicts, Compensation (Chairman) and LTIP
Committees.

(6) Member of the Nominating, Finance and LTIP (Chairman) Committees.

John M. Rudey serves as Chairman, Chief Executive Officer, President
and as a Director of the General Partner. Since 1992, Mr. Rudey has served as
Chief Executive Officer of Garrin Properties Holdings, Inc., a private
investment company that manages and advises investment portfolios principally
concentrated in the timber and forest products industries and in real estate.

Aubrey L. Cole serves as a Director of the General Partner. Since 1989
Mr. Cole has been a consultant for Aubrey Cole Associates, a sole proprietorship
which provides management consulting services and makes investments. From 1986
to 1989, Mr. Cole was the Vice Chairman of the Board and Director of Champion
International Corporation (a publicly traded forest products company) and from
1983 to 1993, Mr. Cole was the Chairman of Champion Realty Corporation (a land
sales subsidiary of Champion International). Mr. Cole is a Director of Deotexas
Inc. (a development stage company).

27

George R. Hornig serves as a Director of the General Partner. Since
1999, Mr. Hornig has been Managing Director of Credit Suisse First Boston's
Private Equity Division. From 1993 to 1999, Mr. Hornig was an Executive Vice
President of Deutsche Bank Americas Holdings, Inc. (the United States arm of
Deutsche Bank, a German banking concern) and affiliated predecessor entities.
From 1991 to 1993, Mr. Hornig was the President and Chief Operating Officer of
Dubin & Swieca Holdings, Inc., an investment management business. From 1988 to
1991, Mr. Hornig was a co-founder, Managing Director and Chief Operating Officer
of Wasserstein Perella & Co., Inc. (a mergers and acquisitions investment bank).
From 1983 to 1988, Mr. Hornig was an investment banker in the Mergers and
Acquisitions Group of The First Boston Corporation. Prior to 1983, Mr. Hornig
was an attorney with Skadden, Arps, Slate, Meagher & Flom. Mr. Hornig is also a
director of Unity Mutual Life Insurance Company and Forrester Research, Inc.

William A. Wyman serves as a Director of the General Partner, having
been elected to the Board in January, 1999. Mr. Wyman is a former President of
the Management Consulting Group of Booz, Allen & Hamilton. Mr. Wyman joined Booz
Allen in 1965, where, until 1984 when he retired, he counseled a variety of
service, natural resources and manufacturing companies on projects concerning
strategic profit improvement and management organization. Mr. Wyman has served
as a director of Donaldson, Lufkin & Jenrette, SS&C Technologies, Prime
Response, Predictive Systems, Internosis, and Pega Systems.

Alan B. Abramson serves as a Director of the General Partner, having
been elected to the Board in January, 1999. Mr. Abramson is the President of
Abramson Brothers Incorporated, a real-estate management and investment firm,
where he has been employed since 1972. He serves as a Director of Datascope,
Inc., a medical technology company.

Robert F. Wright serves as a Director of the General Partner. Since
1988, Mr. Wright has served as President and Chief Executive Officer of Robert
F. Wright Associates, Inc., a firm making strategic investments and providing
business consulting services. Previously, Mr. Wright spent 40 years, 28 years as
a partner, at Arthur Andersen & Co. Mr. Wright is a director of the following
companies: Hanover Direct Inc. (a catalog marketer), Reliance Standard Life
Insurance Co. and affiliates (life insurance companies), The Navigators Group
Inc. (a property insurance company), Deotexas Inc. (a development stage
company), Universal American Financial Corp. (an insurance company), Quadlogic
Controls Corp. (a meter manufacturer) and G.V.A. Williams Real Estate Co., Inc.
(a real estate company).

Thomas C. Ludlow became Vice President and Chief Financial Officer of
the General Partner in July 2000. From 1998 to 2000, Mr. Ludlow was Chief
Financial Officer of Forest Systems, LLC, a Boston based timber investment
management company. From 1995 to 1998, Mr. Ludlow was Director and head of North
American Forest Products for Deutsche Morgan Grenfell, an international
investment bank. Prior to 1995, Mr. Ludlow worked with various financial
institutions. Mr. Ludlow holds an HBA in Business from the University of Western
Ontario and an MBA from the Anderson School at the University of California, Los
Angeles.

Martin Lugus serves as Vice President - Timberland Operations of the
General Partner, responsible for all land management and operations on fee
lands. Mr. Lugus was employed by Weyerhaeuser for 28 years, during which time he
served as Forestry Manager from 1981 to 1991 and Timberlands Manager from 1991
to 1996 and then for the General Partner in his current role.

Toby A. Luther serves as the Corporate Controller - Western Operations
of the General Partner, responsible for all accounting functions. Prior to
joining the General Partner in 1999, Mr. Luther was an accountant with
PricewaterhouseCoopers.

28

Key Employees

Walter L. Barnes serves as Assistant Vice President - Harvesting of
the General Partner, responsible for all solid wood logging and fiber
operations. From 1993-1996, prior to joining the General Partner, Mr. Barnes
acted as the Operations Harvest Manager for Weyerhaeuser. Mr. Barnes was
employed by Weyerhaeuser for 28 years and has extensive experience managing
different harvesting systems on both the East and West sides of the Cascade
Range.

Robert A. Broadhead serves as Assistant Vice President - Marketing of
the General Partner since 1996, responsible for all log and stumpage sales
transactions. Prior to joining the General Partner in 1996, Mr. Broadhead was
employed by Weyerhaeuser for 20 years and gained additional experience in
investing and planning while serving as Planning Manager from 1981 to 1994.

Jay Jeffrey Vermilya serves as Assistant Vice President - Planning of
the General Partner, responsible for all harvest planning as well as operating
and developing the inventory and GIS systems. From 1979 to 1987 Mr. Vermilya
worked for Crown Zellerbach Corp. and them from 1987 to 1994 as Chief Forester
for the Cambell Group. Mr. Vermilya then went to work for Weyerhaeuser as
district forester and then for the General Partner in 1996 in the same role
until 2000, when he assumed his current responsibilities.

Christopher J. Sokol serves as Assistant Vice President - Forestry of
the General Partner, responsible for forestry operations, environmental
relationships, harvest prescriptions and nursery/orchard operations. Prior to
joining the General Partner in 1996, Mr. Sokol was employed by Weyerhaeuser for
22 years and gained additional experience in forest regeneration and timber
sales while serving as District Forester from 1982 to 1991 and as Forestry
Manager thereafter.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the General Partner's officers and directors, and persons who own more
than 10% of a registered class of equity securities of the Company, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the Nasdaq National Market. Officers, directors and greater than
ten percent securityholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.

Based on its review of the copies of such forms received by it, or
written representations regarding ownership of the Company's securities, the
Company believes that during the fiscal year 2000, all filings required were
properly made.

29

Item 11. Executive Compensation

The Company and the General Partner were formed in June 1997. Under
the terms of the Partnership Agreement, the Company is required to reimburse the
General Partner for expenses relating to the operation of the Company, including
salaries and bonuses of employees employed on behalf of the Company, as well as
the costs of providing benefits to such persons under employee benefit plans and
for the costs of health and life insurance.

The following table sets forth annual salary, bonus and all other
compensation awards and payouts earned by the General Partner's Chief Executive
Officer and the four most highly compensated executive officers who earned in
excess of $100,000 (the "Named Executive Officers") for services rendered during
the fiscal year ended December 31, 2000:

SUMMARY COMPENSATION TABLE
--------------------------

Long-Term
Annual Compensation
Compensation Awards
------------ ------

Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary ($) Bonus ($) Options/SARs(#) Compensation
-------- ---- ---------- --------- --------------- ------------

John M. Rudey 2000 $ 463,500 $ 256,750 -- --
Chairman and 1999 450,000 225,000 50,000 --
Chief Executive Officer 1998 300,000 150,000 -- --

Thomas C. Ludlow 2000 80,208 75,000 50,000 --
Vice President and 1999 -- -- -- --
Chief Financial Officer 1998 -- -- -- --

Martin Lugus 2000 123,600 30,900 -- --
Vice President - Timberland 1999 120,000 35,000 -- --
1998 101,521 24,625 -- --

Walter L. Barnes 2000 97,850 24,463 -- --
Assistant Vice President 1999 95,000 23,750 -- --
- Harvesting 1998 80,000 20,150 -- --

Robert A. Broadhead 2000 92,700 23,175 -- --
Assistant Vice President 1999 90,000 22,500 -- --
- Marketing 1998 77,150 19,275 -- --

Greg G. Byrne (1) 2000 110,833 41,833 -- --
Vice President and 1999 150,000 90,000 50,000 --
Chief Financial Officer 1998 -- -- -- --

- ----------------------

(1) In August of 2000 Mr. Byrne resigned as the CFO of U.S. Timberlands.

30

Long-Term Incentive Plan

The General Partner has adopted the U.S. Timberlands Company, LP
Amended and Restated 1997 Long-Term Incentive Plan (the "Long-Term Incentive
Plan") for key employees and directors of the General Partner and its
affiliates. The summary of the Long-Term Incentive Plan contained herein does
not purport to be complete and is qualified in its entirety by reference to the
Long-Term Incentive Plan, which is filed as an exhibit to the Company's Form S-1
Registration Statement. The Long-Term Incentive Plan consists of two components,
a unit option plan (the "Unit Option Plan") and a restricted unit plan (the
"Restricted Unit Plan"). The Long-Term Incentive Plan currently permits the
grant of Unit Options and Restricted Units covering an aggregate of 857,748
Common Units.

Unit Option Plan. The Unit Option Plan currently permits the grant of
options ("Unit Options") covering 857,748 Common Units. Unit Options granted
during the Subordination Period will become exercisable automatically upon, and
in the same proportions as, the conversion of the Subordinated Units to Common
Units. If a grantee's employment is terminated by reason of his death,
disability or retirement, the grantee's Unit Options will become immediately
exercisable. In addition, a grantee's Unit Options will become immediately
exercisable in the event of a "change of control" of the Company (as defined in
the Long-Term Incentive Plan).

Upon exercise of a Unit Option, the General Partner will acquire
Common Units in the open market at a price equal to the then-prevailing price on
the principal national securities exchange upon which the Common Units are then
traded, or directly from the Company or any other person, or use Common Units
already owned by the General Partner, or any combination of the foregoing. The
General Partner will be entitled to reimbursement by the Company for the
difference between the cost incurred by the General Partner in acquiring such
Common Units and the proceeds received by the General Partner from an optionee
at the time of exercise. Thus, the cost of the Unit Options will be borne by the
Company. If the Company issues new Common Units upon exercise of the Unit
Options, the total number of Units outstanding will increase and the General
Partner will remit the proceeds received from the optionee to the Company.

The Unit Option Plan has been designed to furnish additional
compensation to key executives and key directors and to increase their
proprietary interest in the future performance of the Company measured in terms
of growth in the market value of Common Units.

31

The following table sets forth certain information with respect to
option grants to the named executive officers during fiscal 2000:

OPTION/SAR GRANTS IN LAST FISCAL YEAR

Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options/SARs of Unit Appreciation
Underlying Granted Exercise or for Option Term (2)
--------------------
Options/SARs to Employees Base Price Expiration
Name Granted During Fiscal Year ($/Unit) (1) Date 5% 10%
---- ------- ------------------ ------------- ---- -- ---

Thomas C. Ludlow 50,000 92.6% $9.813 07/03/10 $308,567 $781,970

(1) The Unit Options become exercisable automatically upon, and in the same
proportion as, the conversion of the Subordinated Units to Common
Units, which date shall be no earlier than the date of record for the
distribution for the quarter ended December 31, 2000.

(2) A ten-year period (the maximum length of the Unit Option term) was used
for compounding purposes in the above calculations.

32

The following table sets forth certain information with respect to the
aggregate number and value of options at the fiscal year-end 2000:

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR ENDED OPTION/SAR VALUES
-----------------------------------

Number of Securities
Underlying/Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs at
Shares December 31, 2000 December 31, 2000
----------------- -----------------
Acquired
Name on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------

John M. Rudey -- $-- -- 157,218 $-- N/A (1)

Thomas C. Ludlow -- $-- -- 50,000 $-- N/A (1)

Martin Lugus -- $-- -- 64,331 $-- N/A (1)

Walter L. Barnes -- $-- -- 34,310 $-- N/A (1)

Robert A. Broadhead -- $-- -- 34,310 $-- N/A (1)

Greg G. Byrne (2) -- $-- -- -- $-- N/A

(1) At the close of trading on December 31, 2000, the market value of the
Common Units was $6.69 per common unit. Since the Unit Options, once
exercisable, would be exercisable at a range of $9.813 to $14.750 per
unit, the in-the-money computation is inapplicable.

(2) In August of 2000 Mr. Byrne resigned as the CFO of U.S. Timberlands.

Restricted Unit Plan. A Restricted Unit is a "phantom" unit that
entitles the grantee to receive a Common Unit upon the vesting of the phantom
unit. No grants have been made under the Restricted Unit Plan. The LTIP
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall determine.
Restricted Units granted during the Subordination Period will vest automatically
upon, and in the same proportions as, the conversion of the Subordinated Units
to Common Units. Common Units to be delivered upon the "vesting" of rights may
be Common Units acquired by the General Partner in the open market, Common Units
already owned by the General Partner, Common Units acquired by the General
Partner directly from the Company or any other person, or any combination of the
foregoing. The General Partner will be entitled to reimbursement by the Company
for the cost incurred in acquiring such Common Units. If the Company issues new
Common Units, the total number of Units outstanding will increase and the
Company will receive no remuneration.

The issuance of the Common Units pursuant to the Restricted Unit Plan
is intended to serve as a means of incentive compensation for performance and
not primarily as an opportunity to participate in the equity appreciation in
respect of the Common Units. Therefore, no consideration will be payable by the
plan participants upon vesting and issuance of the Common Units.

The General Partner's Board of Directors in its discretion may
terminate the Long-Term Incentive Plan at any time with respect to any Common
Units or Unit Options for which a grant has not theretofore been made. The
General Partner's Board of Directors will also have the right to alter or amend
the Long-Term Incentive Plan or any part thereof from time to time; provided,
however, that no change in any outstanding grant may be made that would impair
the rights of the participant without the consent of such participant.

33

Compensation of Directors

Compensation for Directors of the General Partner covers services
rendered for both the Company and the Operating Company. No additional
remuneration will be paid to employees who also serve as directors. Each
independent director receives $50,000 annually, for which they each agree to
participate in four regular meetings of the Board of Directors and four
Audit/Conflicts Committee meetings. Each other non-employee director receives
$50,000 annually (to be paid in cash or Subordinated Units, as determined by
each director), for which they each agree to participate in four regular
meetings of the Board of Directors. Each non-employee director will receive
$1,250 for each additional meeting in which he participates. In addition, each
non-employee director will be reimbursed for his out-of-pocket expenses in
connection with attending meetings of the Board of Directors or committees
thereof. Each director will be fully indemnified by the Company for his actions
associated with being a director to the extent permitted under Delaware law.

The General Partner has entered into consulting agreements with each of
Aubrey Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F.
Wright Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr.
Hornig pursuant to which each such person or firm provides consulting services
to the General Partner. Each such agreement provides for an annual retainer of
$25,000, plus $150 per hour (with a maximum per diem of $1,200) for services
rendered at the request of the General Partner. In addition, the General Partner
entered into a consulting agreement with Mr. Wyman that provides for an annual
retainer of $50,000 for services rendered at the request of the General Partner.
Each consulting agreement will be reviewed annually by a majority of the
directors who do not have consulting agreements.

The Company paid approximately $129,000, $117,000 and $144,000 to the
Directors of the General Partner for consulting services during 2000, 1999 and
1998, respectively.

Employment Agreements

The General Partner has entered into an employment agreement with Mr.
Rudey (the "Executive"). The agreement has a term expiring on December 31, 2002,
and includes confidentiality and non-compete provisions.

The agreement provides for an annual base salary of $450,000, subject
to such increases as the Board of Directors of the General Partner may authorize
from time to time. Effective January 1, 2001, the Board of Directors authorized
an increase to $463,500. In addition, the Executive is eligible to receive an
annual cash bonus to be determined by the Compensation Committee not to exceed
100% of his base salary. The Executive will be entitled to participate in such
other benefit plans and programs as the General Partner may provide for its
employees in general.

The agreement provides that in the event the Executive's employment is
terminated without "Cause" (as defined in the Employment Agreements) or if the
Executive terminates his employment for "Good Reason" (as defined below), such
individual will be entitled to receive a severance payment in an amount equal to
his base salary for the remainder of the employment term under the Employment
Agreement or 12 months, whichever is less, plus a prorated bonus for the year of
such termination calculated based on the bonus being equal to 100% of base
salary. In the event of termination due to death or disability, the Executive
will be entitled to accrued salary and benefits up to the date of the
termination. In the event the individual's employment is terminated for "Cause,"
he will receive accrued salary and benefits up to the date of termination.

Good Reason is defined in the agreement generally as: (i) failure of
the General Partner's members to elect or re-elect the Executive to the Board of
Directors, (ii) failure of the General Partner to vest in the Executive the
position, duties and responsibilities contemplated by his Employment Agreement,
(iii) failure of the General Partner to pay any portion of the Executive's
compensation, (iv) any material breach by the General Partner of any material
provision of the Employment Agreement and (v) a material reduction in the
individual's duties, responsibilities or status upon a "change of control" as
defined in the Employment Agreement. "Cause" is defined generally as: (i) any
felony conviction, (ii) any material breach by the Executive of a material
written agreement between the Executive and the Company, (iii) any breach caused
by the Executive of the Partnership Agreement, (iv) any willful misconduct by
the Executive materially injurious to the Company, (v) any willful failure by
the Executive to comply with any material policies, procedures or directives of
the Board of Directors of the General Partner or (vi) any fraud,
misappropriation of funds, embezzlement or other similar acts of misconduct with
respect to the Company.

34

Committee Interlocks and Insider Participation in Compensation Decisions

The Compensation Committee of the General Partner is composed of
Messrs. Rudey, Abramson, Wyman, Hornig and Cole. Mr. Rudey also serves as
Chairman of the General Partner.

The duties of the Compensation Committee are to (i) determine the
annual salary, bonus and benefits, direct and indirect, of all executive
officers, (ii) review and recommend to the full Board any and all matters
related to benefit plans covering the foregoing officers and any other employees
and (iii) serve as the Long-Term Incentive Plan Committee for the Company's
Long-Term Incentive Plan.

When setting executive officer compensation levels, the Compensation
Committee considers a variety of quantitative and qualitative criteria tied to
the strategic goals of the Company, such as maintaining the Minimum Quarterly
Distribution, an executive's acceptance of additional responsibility and
acquisition activity. The above factors were applied by the Compensation
Committee in determining the salary and bonus amounts for all executives,
including the CEO.

35

Performance Table

The table below compares the total return of the Common Units of the
Company (TIMBZ) from November 1997 through December 2000 with the Wilshire 5000
Index (WFKX) and a portfolio (TIMBER) consisting of Boise Cascade Corporation,
Plum Creek Timber Co., LP and Crown Pacific Partners, LP.

Wilshire
TIMBZ 5000 Timber
Nov-97 100.0000 100.0000 100.0000
Dec-97 100.0000 101.7041 94.8159
Jan-98 102.1084 102.1701 103.0243
Feb-98 101.5060 109.4505 105.7192
Mar-98 102.4096 114.7915 106.6448
Apr-98 102.4097 116.0483 110.3326
May-98 99.9036 112.8172 103.2802
Jun-98 94.5962 116.6389 102.2380
Jul-98 93.6596 113.9777 93.3714
Aug-98 78.2635 96.0984 83.0277
Sep-98 89.8106 102.2357 91.1198
Oct-98 93.6596 109.7327 95.9279
Nov-98 78.4894 116.4924 96.2521
Dec-98 70.5745 123.7924 93.2970
Jan-99 76.5107 128.2464 94.4403
Feb-99 71.7288 123.4479 93.9282
Mar-99 65.5806 128.0594 98.6391
Apr-99 74.4613 134.0939 109.4980
May-99 72.3338 131.0268 110.3067
Jun-99 79.4254 137.5426 116.7776
Jul-99 89.3536 133.1827 112.8808
Aug-99 75.1705 131.8384 106.2163
Sep-99 63.3790 128.1250 109.7610
Oct-99 72.9596 136.1732 105.1903
Nov-99 65.2796 140.5742 99.5787
Dec-99 60.6716 151.0840 102.8186

36

Jan-00 68.3516 144.7171 97.2321
Feb-00 65.2796 147.7839 91.7633
Mar-00 64.0707 156.3723 104.4350
Apr-00 67.6974 148.1197 103.8459
May-00 67.2743 142.7739 101.9652
Jun-00 66.0049 148.9598 94.4175
Jul-00 67.6974 145.8096 99.8345
Aug-00 69.3898 156.1974 97.8788
Sep-00 70.2360 148.9049 89.2642
Oct-00 39.7722 145.6366 98.6537
Nov-00 49.9465 130.9967 93.0633
Dec-00 49.4840 133.1803 88.0087
Jan-01 58.9646 138.1624 86.1871
Feb-01 61.1850 124.9703 83.3621

37

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth the beneficial ownership of Units held
by beneficial owners of five percent or more of the Units, by directors and
executive officers of the General Partner and by all directors and executive
officers of the General Partner as a group as of February 28, 2001.

Percentage of
Percentage of Subordinated Subordinated Percentage of
Common Units Common Units Units Units Total Units
Beneficially Beneficially Beneficially Beneficially Beneficially
Name of Beneficial Owners Owned Owned Owned Owned Owned

Rudey Timber Company, LLC (1) 1,030,089 10.7% 2,170,618 67.6% 24.9%

U.S. Timberlands Management
Company, LLC (2) 311,141 3.2% 933,424 29.1% 9.7%

U.S. Timberlands Holdings, LLC (3) 723,539 7.5% 2,170,618 67.6% 22.5%

John M. Rudey (4) 1,817,645 18.8% 3,104,042 96.7% 38.2%

Thomas C. Ludlow (5) 12,500 * -- -- *

George R. Hornig (6) 240,345 2.5% 36,120 1.1% 2.1%

Robert F. Wright (7) 189,000 2.0% -- -- 1.5%

Aubrey L. Cole (8) 189,000 2.0% -- -- 1.5%

Alan B. Abramson (9) 12,500 * -- -- *

William A. Wyman (10) 12,500 * -- -- *

All Directors and Executive Officers
as a Group (7 persons) 1,906,490 19.5% 3,140,162 97.8% 38.9%

- --------------------------

*- Less than 1% of class.

(1) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
Includes all 2,894,157 of the Subordinated Units owned by Holdings.
Rudey Timber Company, LLC has a 99% member interest in Holdings.

(2) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.

(3) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.

(4) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
Includes 1,244,565 Subordinated Units beneficially owned by Old
Services and 2,894,157 Subordinated Units beneficially owned by
Holdings. Mr. Rudey is attributed 100% beneficial ownership of all
Subordinated Units owned by Old Services and Holdings through his
interests therein and in Rudey Timber Company, LLC Includes an
aggregate of 541,450 Common Units owned by Rudey Timber Company, John
Rudey's minor children, Garrin Properties Group and U.S. Timberlands
Service Company, LLC, respectively. In addition, Mr. Rudey's units
include all 189,000 of Common Units owned by U.S. Timberlands Services
Co., LLC. Mr. Rudey owns a 78.75% interest in U.S. Timberlands
Services Company, LLC, the Partnership's General Partner. Also
includes 39,305 Common Unit equivalents representing exercisable unit
options at February 28, 2001.

(5) Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
Common Units beneficially owned are Common Unit equivalents
representing exercisable unit options at February 28, 2001.

(6) Current address is 1220 Park Avenue, New York, NY 10128. Includes all
189,000 Common Units owned by U.S. Timberlands Services Co., LLC. Mr.
Hornig owns a 16.25% interest in U.S. Timberlands Services Company,
LLC, the Partnership's General Partner. Also includes 39,305 Common
Unit equivalents representing exercisable unit options at February 28,
2001.

(7) Current address is 57 West 57th Street, Suite 704, New York, NY 10019.
. Includes all 189,000 Common Units owned by U.S. Timberlands Services
Co., LLC. Mr. Wright owns a 2.5% interest in U.S. Timberlands Services
Company, LLC, the Partnership's General Partner.

(8) Current address is 16825 Northchase Drive, Suite 800, Houston, TX
77060. . Includes all 189,000 Common Units owned by U.S. Timberlands
Services Co., LLC. Mr. Cole owns a 2.5% interest in U.S. Timberlands
Services Company, LLC, the Partnership's General Partner.

(9) Current address is 501 Fifth Avenue, New York, NY 10017. Common Units
beneficially owned are Common Unit equivalents representing
exercisable unit options at February 28, 2001.

(10) Current address is 4 North Balch Street, Hanover, NH 03755. Common
Units beneficially owned are Common Unit equivalents representing
exercisable unit options at February 28, 2001.

All of the outstanding member interests in the General Partner are
owned by management, directors and related persons and entities. The members of
the General Partner are parties to an operating agreement, which, among other
things, provides that the member interests of management and directors who
retire, resign or otherwise terminate their relationship with the General
Partner will be repurchased by the General Partner. In addition, each member
other than affiliates of Mr. Rudey is provided certain "tag along" and "bring
along" rights with respect to sales of member interests in the General Partner
by Mr. Rudey's affiliates. See "Certain Relationships and Related
Transactions--Repurchase of Certain Member Interests; Severance Payments."

38

Item 13. Certain Relationships and Related Transactions

The Company is managed by the General Partner pursuant to the
Partnership Agreement. Under the Partnership Agreement the General Partner is
entitled to reimbursement of certain costs of managing the Company. These costs
included compensation and benefits payable to officers and employees of the
General Partner, payroll taxes, general and administrative expenses and legal
and professional fees.

Consulting Agreements

The General Partner has entered into consulting agreements with each of
Aubrey Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F.
Wright Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr.
Hornig pursuant to which each such person or firm provides consulting services
to the General Partner. Each such agreement provides for an annual retainer of
$25,000, plus $150 per hour (with a maximum per diem of $1,200) for services
rendered at the request of the General Partner. Each consulting agreement will
be reviewed annually by a majority of the directors who do not have consulting
agreements. In addition, the General Partner entered into a consulting agreement
with Mr. Wyman that provides for an annual retainer of $50,000 for services
rendered at the request of the General Partner. See also Compensation of
Directors included in Item 11.

Related Party Transactions

Glenn A. Zane, a principal of Mason, Bruce & Girard, served as the
Acting Senior Vice President and Acting Director of Operations for the Company
during 1999. In January 2000, Mr. Zane resigned as the Acting Senior Vice
President and Acting Director of Operations for the Company. The Company has
continued to utilize Mr. Zane and Mason, Bruce & Girard for consulting services.
The Company paid approximately $821,000 and $925,000 to Mason, Bruce and Girard
during 2000 and 1999, respectively. Such payments were for consulting services
and include Mr. Zane's compensation as Acting Senior Vice President and Acting
Director of Operations during 1999.

Investment in Affiliate

In October 1999, the Company made an investment in U.S. Timberlands
Yakima, LLC (USTY), an unconsolidated affiliate. USTY, a newly formed entity
organized to acquire timber properties located in Central Washington and Central
Oregon, is engaged in the growing of trees and sale of logs and standing timber
to third party wood processors. The Company contributed to USTY $294,000 of cash
for 49% of USTY's common interests (the "Common LLC Interests"). The remaining
Common LLC Interests were acquired for $306,000 in cash by U.S. Timberlands
Holding Group, LLC, a Delaware limited liability company in which John Rudey and
George Hornig, respectively, the Chairman of the Board and a director of the
Company's General Partner, hold a controlling interest. The Company also
acquired all of the senior preferred interests in USTY (the "Senior or Preferred
LLC Interests") for its contribution to USTY of timberlands consisting primarily
of non-income producing, pre-merchantable pine plantations having an agreed upon
value of $22.0 million. The Company recorded its investment in the Senior LLC
interest at its $18.9 million cost basis for the contributed timberlands. Terms
of the Preferred LLC Interests include a cumulative annual guaranteed return of
5% of the $22.0 million agreed upon value of the contributed timberlands. The
Preferred LLC Interests are redeemable at the Company's option on December 31,
2004 or at USTY's option at any time prior thereto, for a redemption price equal
to the agreed upon value of the Preferred LLC Interests plus any portion of the
guaranteed return not received by the Company prior to the redemption date.
Generally, USTY's net income or losses are allocated to the Common LLC
Interests. However, net losses exceeding the account balances of the Common LLC
Interests are allocated to the Preferred LLC Interest. The Company accounts for
the Preferred LLC Interest at cost, reduced by losses, if any, in excess of the
Common LLC Interests. The Company accounts for its Common LLC Interest by the
equity method. The General Partner of the Company provides management services
to USTY for a fee equal to 2% of USTY's earnings before interest, taxes,
depreciation and amortization. The Company granted U.S. Timberlands Holdings
Group, LLC an irrevocable proxy to vote its Common and Preferred Interests.
During 1999, concurrently with and in order to facilitate USTY's acquisition of
the Washington timberlands referred to above, an entity controlled by John M.
Rudey agreed to acquire in the future a portion of the property and any related
liabilities that the Company and USTY were unwilling to acquire, the sale of
which was a condition of the seller to the USTY acquisition. Such entity was
paid $2.7 million by the seller for its agreement to acquire such property and
any related liabilities. The General Partner's Conflicts Committee reviewed and
approved the structure of the Company's investment in the affiliate.

39

Repurchase of Certain Member Interests; Severance Payments

On January 5, 1998, the General Partner made certain changes in senior
management. In connection therewith, Edward J. Kobacker, the former Executive
Vice President and Chief Operating Officer and a former Director of the General
Partner, became entitled to receive approximately $700,000 in severance payments
pursuant to his employment agreement. In addition, pursuant to the terms of the
General Partner's operating agreement, the member interests of each of Mr.
Stephens, Mr. Kobacker and John H. Beuter, a former Director of the General
Partner, were subject to repurchase at an aggregate price of $385,000 payable in
three annual installments commencing February 1, 1998. The Company has
reimbursed the General Partner for such repurchase payments.

During January 1999, the Company paid $260,000, $175,000 and $145,000
to Messrs. Symington, Michie and McDowell, respectively, as severance under
their employment agreements with the Company. In July 1999, under the terms of a
settlement the Company reached with Messrs. Symington, Michie, and McDowell, the
Company committed to pay an additional sum of $675,000 to Messrs. Symington,
Michie, and McDowell.

Affiliate Credit Facility

See the description of the Affiliate Credit Facility included in the
Liquidity and Capital Resources section of Item 7.

40

PART IV

Item 14. Exhibits, Financial Statements, and Reports on Form 8-K

(a)(1) and (2) Financial Statements

See "Index to Financial Statements" set forth on page F-1.

(a)(3) Exhibits

+3.1 -- Amended and Restated Agreement of Limited Partnership of U.S. Timberlands Company, LP

+3.2 -- Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC

+10.2 -- Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands Finance Corp. and
State Street Bank and Trust Company, as trustee

+10.3 -- Contribution, Conveyance and Assumption Agreement among U.S. Timberlands Company, LP
and certain other parties

*10.4 -- Form of U.S. Timberlands Company, LP 1997 Long-Term Incentive Plan

*10.5 -- Employment Agreement for Mr. Rudey

*10.9 -- Supply Agreement between U.S. Timberlands Klamath Falls, LLC and Collins Products LLC

*21.1 -- List of Subsidiaries

23.1 -- Consent of Richard A. Eisner & Company, LLP dated April 13, 2001.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended
December 31, 2000.

* Incorporated by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-1 filed November 13, 1997.
+ Incorporated by reference to the same numbered Exhibit to the Registrant's
Current Report on Form 8-K filed January 15, 1998.

41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 16th day of
April 2001.
U.S. TIMBERLANDS COMPANY, LP

By: U.S. Timberlands Services Company, LLC
Its General Partner

By: /s/ John M. Rudey
--------------------------------------------------
John M. Rudey, Chairman, Chief Executive Officer
and President

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.

April 16, 2001
/s/ John M. Rudey Chairman, Chief Executive Officer,
- --------------------------------------
John M. Rudey President and Director (Principal Executive
Officer)
April 16, 2001
/s/ Thomas C. Ludlow Chief Financial Officer
- --------------------------------------------
Thomas C. Ludlow
April 16, 2001
/s/ Toby A. Luther Corporate Controller -
- -------------------------------------------- Western Operations
Toby A. Luther (Principal Accounting Officer)

April 16, 2001
/s/ Aubrey L. Cole Director
- --------------------------------------------
Aubrey L. Cole
April 16, 2001
/s George R. Hornig Director
- --------------------------------------------
George R. Hornig
April 16, 2001
/s/ Alan B. Abramson Director
- --------------------------------------------
Alan B. Abramson
April 16, 2001
/s/ William A. Wyman Director
- --------------------------------------------
William A. Wyman
April 16, 2001
/s/ Robert F. Wright Director
- --------------------------------------------
Robert F. Wright

42

EXHIBIT INDEX

23.1 Consent of Richard A. Eisner & Company, LLP dated April 13, 2001.

43

CONSOLIDATED FINANCIAL STATEMENTS

Contents Page

Independent auditors' report F-2

Consolidated balance sheets as of December 31, 2000 and 1999 F-3

Consolidated statements of operations for the years ended December 31, 2000, 1999, and 1998 F-4

Consolidated statements of changes in partners' capital for the years ended December 31, 2000,
1999 and 1998 F-5

Consolidated statements of cash flows for the years ended December 31, 2000, 1999 and 1998 F-6

Notes to consolidated financial statements F-7

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Partners of
U.S. Timberlands Company, LP

We have audited the accompanying consolidated balance sheets of U.S. Timberlands
Company, LP and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, changes in partners' capital and cash
flows for each of the years in the three-year period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the financial position of U.S. Timberlands
Company, LP and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with generally accepted accounting
principles.

Richard A. Eisner & Company, LLP

New York, New York
January 24, 2001, except as to Note 15, as
to which the date is February 26, 2001

F-2

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Consolidated Balance Sheets
(in thousands, except unit information)

December 31,
2000 1999
--------- ---------

ASSETS
Current assets:
Cash and cash equivalents $ 3,168 $ 2,798
Accounts receivable, net 4,430 672
Other receivables 160 124
Notes receivable 2,285 2,344
Prepaid expenses and other current assets 35 981
--------- ---------
Total current assets 10,078 6,919

Timber and timberlands, net 264,673 293,828
Investment in affiliate 20,542 18,243
Property, plant and equipment, net 926 1,038
Notes receivable, less current portion - 2,304
Deferred financing fees, net 4,648 5,323
--------- ---------
Total assets $ 300,867 $ 327,655
========= =========

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 1,222 $ 346
Accrued liabilities 3,326 3,286
Deferred revenue 1,474 39
Payable to general partner and affiliate 2,065 840
--------- ---------
Total current liabilities 8,087 4,511
--------- ---------
Long-term debt 225,000 225,000
--------- ---------
Commitments and contingencies (Note 14)

Minority interest 678 981
--------- ---------
Partners' capital:
General partner interest 678 981
Limited partner interest (12,859,607 units issued and outstanding as of
December 31, 2000 and 1999) 66,424 96,182
--------- ---------
67,102 97,163
--------- ---------

Total liabilities and partners' capital $ 300,867 $ 327,655
========= =========

See notes to consolidated financial statements. F-3

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Consolidated Statements of Operations
(in thousands, except unit and per unit amounts)

Year Ended December 31,
2000 1999 1998
-------- -------- --------

Revenues:
Log and stumpage sales $ 72,268 $ 76,594 $ 63,636
Timber and property sales 2,773 - 6,275
By-products and other 571 400 1,413
-------- -------- --------
75,612 76,994 71,324
-------- -------- --------

Cost of products sold:
Cost of timber harvested (19,853) (17,056) (16,683)
Cost of timber and property sales (2,641) - (5,917)
Depletion, depreciation and road amortization (28,816) (23,318) (21,938)
-------- -------- --------
(51,310) (40,374) (44,538)
-------- -------- --------
Gross profit 24,302 36,620 26,786

Selling, general and administrative expenses (8,428) (8,477) (10,462)
Equity in net income (loss) of affiliate 1,990 (901) -
-------- -------- --------
Operating income 17,864 27,242 16,324

Interest expense (21,921) (21,937) (22,183)
Amortization of deferred financing fees (675) (675) (675)
Interest income 403 565 460
Other income (expense), net 208 1,162 (309)
-------- -------- --------
Income (loss) before general partner and minority interest (4,121) 6,357 (6,383)
Minority interest 41 (64) 64
-------- -------- --------
Net income (loss) (4,080) 6,293 (6,319)
General partner interest 41 (64) 64
-------- -------- --------
Net income (loss) applicable to common and
subordinated units $ (4,039) $ 6,229 $ (6,255)
======== ======= ========

Net income (loss) per each common and subordinated
unit - Basic and Diluted ($0.31) $0.48 ($0.49)
======= ====== =======

Weighted average units outstanding 12,859,607 12,859,607 12,859,607

See notes to consolidated financial statements. F-4

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Consolidated Statements of Changes in Partners' Capital
(in thousands)

General Partner Limited Partner Total
Interest Interest Partners' Capital

Balance, January 1, 1998 $ 1,471 $ 144,175 $ 145,646
Distributions to unitholders ($1.73 per unit) (227) (22,249) (22,476)
Net loss (64) (6,255) (6,319)
--------- ------------ ------------

Balance, December 31, 1998 1,180 115,671 116,851
Distributions to unitholders ($2.00 per unit) (263) (25,718) (25,981)
Net income 64 6,229 6,293
--------- ------------ ------------

Balance, December 31, 1999 981 96,182 97,163
Distributions to unitholders ($2.00 per unit) (262) (25,719) (25,981)
Net loss (41) (4,039) (4,080)
--------- ------------ ------------

Balance, December 31, 2000 $ 678 $ 66,424 $ 67,102
========= ============ ============

See notes to consolidated financial statements. F-5

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 2000 and 1999 (dollar
amounts in thousands, except per unit amounts)

Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2000 1999 1998
-------- -------- --------

Cash flows from operating activities:
Net income (loss) $ (4,080) $ 6,293 $ (6,319)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion, amortization and cost of
timber and property sold 31,457 23,318 27,855
(Gain) loss on disposal of assets (39) 66 -
Amortization of deferred financing fees 675 675 675
Equity in net (income) loss of affiliate (1,990) 901 -
Other non-cash items 127 - 361
Minority interest (41) 64 (64)
Changes in assets and liabilities:
Accounts receivable (3,758) 855 999
Other receivables (36) 989 (939)
Notes receivable 2,363 (3,469) 1,065
Prepaid expenses and other current assets 946 (555) 108
Accounts payable 876 (387) (671)
Accrued liabilities 40 (1,119) (653)
Deferred revenue 1,435 (1,575) (4,130)
Payable to general partner and affiliate 896 (553) 257
-------- -------- --------
Net cash provided by operating activities 28,871 25,503 18,544
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (55) (44) (32)
Proceeds from sale of assets 50 8 -
Timber and road additions (2,253) (955) (610)
Investment in affiliate - (294) -
-------- -------- --------
Net cash used in investing activities (2,258) (1,285) (642)
-------- -------- --------
Cash flows from financing activities:
Distributions to partners (25,981) (25,981) (22,476)
Distributions to minority interest (262) (263) (227)
Payment to affiliate - - (1,000)
-------- -------- --------
Net cash used in financing activities (26,243) (26,244) (23,703)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 370 (2,026) (5,801)
Cash and cash equivalents, beginning of period 2,798 4,824 10,625
-------- -------- --------
Cash and cash equivalents, end of period $ 3,168 $ 2,798 $ 4,824

Supplemental cash flow information:
Cash paid for interest $ 21,786 $ 21,746 $ 21,418
======== ======== ========

Noncash activities:
Contribution of timberlands for investment in affiliate $ - $ 18,850 $ -

See notes to consolidated financial statements. F-6

1.Business and Significant Accounting Policies:
Business
U.S. Timberlands Company, LP (the "MLP"), a Delaware limited partnership, was
formed in 1997 to acquire and own 99% of the equity interests in U.S.
Timberlands Klamath Falls, LLC ("USTK and the "Operating Company") and through
the Operating Company to acquire and own the business and assets of U.S.
Timberlands Management Company, LLC, formerly known as U.S. Timberlands Services
Company, LLC. As used herein, "Company" refers to the consolidated entities of
the MLP and the Operating Company.

The primary activity of the Company is the growing of trees and the sale of logs
and standing timber to third party wood processors. The Company's timber is
located in Oregon, east of the Cascade Range. Logs harvested from the
timberlands are sold to unaffiliated domestic conversion facilities. These logs
are processed for sale as lumber, plywood and other wood products, primarily for
use in new residential home construction, home remodeling and repair and general
industrial applications.

U.S. Timberlands Services Company, LLC (the "General Partner" and "New
Services") manages the businesses of the MLP and the Operating Company. The
General Partner owns a 1% general partner interest in the MLP and a 1% general
partner interest in the Operating Company. All management decisions related to
the Company are made by the General Partner.

Consolidation
The accompanying consolidated financial statements include the accounts of the
MLP and its subsidiary, the Operating Company. All material intercompany
transactions and balances have been eliminated. An investment in an affiliate is
accounted for by the equity method (See Note 3).

Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Revenue Recognition
Revenue on delivered log sales are recognized upon delivery to the customer.
Revenue on timber deeds and timber and property sales are generally recognized
upon closing. Revenue from timber sold under stumpage contracts (i.e., the
customer arranges to harvest and deliver the logs) is recognized when the timber
is harvested. Deferred revenue as of December 31, 2000 represents a customer
deposit for a timber deed sale that was closed in January 2001. At December 31,
1999 deferred revenue represents cash received in advance of logs harvested
under stumpage contracts.

F-7

1. Business and Significant Accounting Policies (Continued):
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable. The
majority of the Company's trade accounts and notes receivable are derived from
sales to third party wood processors. The Company's four largest customers
accounted for approximately 22%, 14%, 11%, and 10% of the Company's aggregate
net revenues from log, stumpage, and timber deed sales for the year ended
December 31, 2000. In 1999, these customers represented approximately 17%, 15%,
18%, and 14%, respectively, of aggregate net revenues from log, stumpage and
deed sales. In 1998, these four customers accounted for approximately 27%, 18%,
19%, and 10% of aggregate net revenues from log, stumpage and deed sales. No
other single customer accounted for more than 10% of aggregate net revenues from
log, stumpage, and timber deed sales in those years. Credit risk on trade
receivables is mitigated by control procedures to monitor the credit worthiness
of customers. The Company mitigates credit risk related to notes receivable by
obtaining asset lien rights or performing credit worthiness procedures or both.
The Company's four largest customers accounted for 27% of the Company's accounts
receivable at December 31, 2000 and none of the Company's accounts receivable at
December 31, 1999. The Company periodically reviews its allowance for doubtful
accounts and reserves an estimated amount for such accounts. As of December 31,
2000 and 1999 the Company had an allowance for doubtful accounts of $550 and
$200, respectively.

Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with maturities
at date of purchase of 90 days or less.

Timber and Timberlands
Timber and timberlands is comprised of timber, timberlands, logging roads, and
seed stock and nursery stock.

Timber, timberlands and roads
Timber, timberlands and roads are stated at cost less depletion and amortization
for timber previously harvested. The cost of the timber harvested (including
logging roads) is determined based on the volume of timber harvested in relation
to the amount of estimated net merchantable volume, utilizing a single composite
pool. The Company estimates its timber inventory using statistical information
and data obtained from physical measurements, site maps, photo-types and other
information gathering techniques. These estimates are updated annually and may
result in adjustments of timber volumes and depletion rates, which are
recognized prospectively. Changes in these estimates have no effect on the
Company's cash flow.

Seed orchard and nursery stock
The Company operates and maintains a seed orchard and nursery. Costs incurred by
the orchard and nursery to produce seed and seedlings utilized in the
reforestation of the Company's timberlands are capitalized to seed orchard and
nursery stock in the accompanying balance sheets. A certain amount of seed and
seedling stock is sold to unaffiliated customers and is reflected as a component
of by-products and other revenues in the accompanying statements of operations.

F-8

1. Business and Significant Accounting Policies (Continued):
Property, Plant and Equipment
Property, plant and equipment, including significant improvements thereto, are
stated at cost less accumulated depreciation and amortization. Cost includes
expenditures for major improvements and replacements. Maintenance and repairs
are charged to expense as incurred. When assets are sold, retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in income.

The cost of property, plant and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets. Buildings and
improvements are generally depreciated over 40 years and equipment is
depreciated over 3 to 5 years. Leasehold improvements are amortized under the
straight-line method based on the shorter of the lease periods or the estimated
useful lives of the improvements.

Deferred Financing Fees
Deferred financing fees consist of fees incurred in connection with obtaining
the related debt financing. The Company amortizes deferred financing fees over
the terms of the related debt. The Company presents deferred financing fees net
of accumulated amortization. The accumulated amortization of deferred financing
fees as of December 31, 2000 and 1999 was $2,102 and $1,427, respectively.

Minority Interest
The General Partner holds a 1% minority interest ownership in the Operating
Company (the "Minority Interest"). A pro rata share of the Operating Company's
results of operations are allocated to the Minority Interest in the accompanying
financial statements.

Income Taxes
The MLP is a master limited partnership and USTK is a limited liability company
("LLC"). Accordingly, the MLP and the LLC are not liable for federal or state
income taxes since the MLP's and the LLC's income or loss is reported on the
separate tax returns of the individual Unitholders or members. Accordingly, no
provision for current or deferred income taxes has been reflected in the
accompanying financial statements.

Per Unit Information
Net income (loss) per unit is calculated using the weighted average number of
common and subordinated units outstanding, divided into net income (loss), after
adjusting for the 1% General Partner interest in the MLP. For the years ended
December 31, 2000, 1999 and 1998 there were 12,859,607 total weighted average
units outstanding comprised of 8,577,487 common units and 4,282,120 subordinated
units. Unit options will be included in calculating diluted net income (loss)
per unit, assuming the results would be dilutive, upon achievement of the
performance criteria which, if maintained for the required period, would result
in the options becoming excercisable (See Note 10). Unit options have not been
included in the diluted calculation as the effect is anti-dilutive.

Unit-Based Compensation Plans
The Company accounts for unit-based compensation plans under the provisions of
the Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued
to Employees". The Company has adopted the disclosure only provisions of the
Financial Accounting Standards Board Statement No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" (see Note 10).

F-9

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 2000 and 1999 (dollar
amounts in thousands, except per unit amounts)

1. Business and Significant Accounting Policies (Continued):
New Accounting Standard
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which as amended, is required to be adopted
for fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133
requires the Company to recognize all derivatives in the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
earnings. If the derivative is a hedge, depending upon the nature of the hedge,
changes in fair value of the derivative will either be offset against the
changes in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Although the Company
had no outstanding derivative positions at December 31, 2000, it will absorb a
loss of approximately $74 from its allocable share of the cumulative effect of
adoption of SFAS 133 by its equity basis investee, U.S. Timberlands Yakima, LLC,
to reduce the carrying value of an interest rate cap agreement to its fair
value.

Reclassifications
Certain amounts in prior years have been reclassified for comparability purposes
and have no impact on net income or partners' capital.

2. Timber and Timberlands:
Timber and Timberlands consisted of the following at December 31:

2000 1999
-------- ------

Timber and logging roads $317,215 $317,856
Timberlands 39,111 39,338
Seed orchard and nursery stock 1,364 1,277
-------- --------

357,690 358,471
Less accumulated depletion and road amortization 93,017 64,643
-------- --------

$264,673 $293,828
======== ========

F-10

3. Investment in Affiliate:
Following is summarized financial information for U.S. Timberlands Yakima, LLC,
the Company's equity basis affiliate (See Note 9), as of and for the years ended
December 31:

2000 1999
-------- --------

Current assets $ 3,887 $ 9,129
Noncurrent assets, principally timber and timberlands 71,174 74,726
Current liabilities 11,195 5,611
Noncurrent liabilities - long-term debt 42,807 60,000
Redeemable preferred member interest (owned by the
Operating Company) 20,295 18,243
Net sales 25,606 560
Gross profit 10,018 342
Net income (loss) 2,815 (1,207)

4. Property, Plant and Equipment:
Property, plant and equipment consisted of the following at December 31:

2000 1999
------ ------

Equipment $ 661 $ 674
Buildings and improvements 843 843
------ ------

1,504 1,517
Less accumulated depreciation and amortization 578 479
------ ------

$ 926 $1,038
====== ======

5. Accrued Liabilities:
Accrued liabilities consisted of the following at December 31:

2000 1999
------ ------

Interest $2,792 $2,729
Severance and harvest tax 217 242
Other 317 315
------ ------

$3,326 $3,286
====== ======

F-11

6. Short-Term Debt:
In 2000, the Company extended a credit facility with an affiliate of the General
Partner (the "Affiliate Credit Facility"), which allows the Company to borrow up
to $12.0 million. The Company's obligations under the Affiliate Credit Facility
represent unsecured general obligations. Borrowings under the Affiliate Credit
Facility bear interest at the prime lending rate as published in the Wall Street
Journal plus applicable margin (1.25% at December 31, 2000), which is based on
the Company's leverage ratio. The prime lending rate was 9.50% at December 31,
2000. The Affiliate Credit Facility expires on June 30, 2001 and all amounts
borrowed thereunder shall then be due and payable. There were no outstanding
borrowings under the Affiliate Credit Facility at December 31, 2000 and 1999.
Peak borrowings were $6,000 and $3,000 under the Affiliate Credit Facility
during 2000 and 1999, respectively. A commitment fee of 0.5% is payable
quarterly on the unused available portion of the Affiliate Credit Facility.
Total interest and fees paid to the affiliate were $130 and $58 in 2000 and $25
and $29 in 1999, respectively.

The Affiliate Credit Facility contains certain restrictive covenants, including
limits on the ability of the Company to make cash distributions, incur certain
additional indebtedness or incur certain liens. The Affiliate Credit Facility
also contains financial ratio covenants as to EBITDDA (earnings before interest,
taxes, depreciation, depletion, and amortization), interest coverage ratio, and
leverage ratio. The Company was in compliance with these covenants at December
31, 2000.

7. Long-Term Debt:
Senior Notes
The $225,000 of Notes, which were issued in 1997, were issued jointly and
severally by the Operating Company and U.S. Timberlands Finance Corp. ("Finance
Corp."), a wholly owned subsidiary of the Operating Company (collectively, the
"Issuers"). The Issuers serve as co-obligors of the Notes. The Notes represent
unsecured general obligations of the Company and bear interest at 9-5/8% payable
semiannually in arrears on May 15 and November 15, and mature on November 15,
2007 unless previously redeemed. The Notes are redeemable at the option of the
Issuers in whole or in part, on or after November 15, 2002 at predetermined
redemption prices plus accrued interest to the redemption date.

The Notes contain certain restrictive covenants, including limiting the ability
of the Operating Company and its subsidiaries to make cash distributions, incur
additional indebtedness, sell assets or harvest timber in excess of certain
limitations.

8. Partners' Capital:
Partnership Equity
The partnership had 8,577,487 Common Units and 4,282,120 Subordinated Units
outstanding on December 31, 2000 and 1999. In February 2001, 1,070,530
Subordinated Units converted into common units (See Note 15).

Partnership Income (loss)
As provided in the MLP Agreement and the Operating Company's Operating
Agreement, income and losses are allocated 98% to the holders of outstanding
Common Units (the Common Unitholders) and Subordinated Units (the Subordinated
Unitholders), 1% to the General Partner's general partner interest in the MLP
and 1% to the General Partner's minority interest in the Operating Company.

F-12

8. Partners' Capital (Continued):
Cash Distributions
The Company is required to make quarterly cash distributions from Available
Cash, as defined in the MLP Agreement. Generally, cash distributions are paid in
order of preferences: first, the minimum quarterly distribution of $.50 per unit
(the "MQD") to Common Unitholders and the General Partner, and second, to the
extent cash remains available, to Subordinated Unitholders.

The MLP Agreement sets forth certain cash distribution target rates for the
Company to meet in order for the General Partner's share of Available Cash to
increase (such increases referred to as "Incentive Distributions"). To the
extent that the quarterly distributions exceed $.550 per Common and Subordinated
Unit, the General Partner receives 15% of the excess Available Cash rather than
the base amount of 2%. To the extent that the quarterly distributions exceed
$.633 per Common and Subordinated Unit, the General Partner receives 25% of the
excess Available Cash and to the extent that the quarterly distributions exceed
$.822 per Common and Subordinated Unit, the General Partner receives 50% of the
excess Available Cash. Since the quarterly distributions did not exceed the
minimum quarterly distributions for 2000, 1999 or 1998, the General Partner did
not receive any such Incentive Distributions for those years.

Subordinated Units
The Subordinated Units are subordinated in right of distributions to the right
of Common Unitholders to receive the MQD. Provided that the MQD has been paid to
Common and Subordinated Unitholders for three consecutive four-quarter periods
and that such distributions are equal to or less than the Company's Adjusted
Operating Surplus, as that term is defined in the MLP Agreement, for two
consecutive four-quarter periods, 25% of the Subordinated Units will convert to
Common Units as early as 2001, 25% as early as 2002 and the remaining 50% may
convert to Common Units as early as 2003. In February 2001, 25% of the
Subordinated Units converted to Common Units (See Note 15).

Liquidation Preference
During the subordination period, Common Unitholders will generally be entitled
to receive more per unit in liquidating distributions than Subordinated
Unitholders. Following conversion of the Subordinated Units into Common Units,
all units will receive the same liquidation treatment.

9. Certain Relationships and Related Party Transactions:
General Partner
The General Partner has the ability to control management of the Company and has
all voting rights of the Company except for certain matters set forth in the MLP
Agreement, as amended ("MLP Agreement"). The ownership of Subordinated and
Common Units by certain affiliates of the General Partner effectively gives the
General Partner the ability to prevent its removal.

The General Partner does not receive any management fee or other compensation in
connection with its management of the Company. The General Partner and its
affiliates perform services for the Company and are reimbursed for all expenses
incurred on behalf of the Company, including the costs of employee, officer and
director compensation properly allocable to the Company, and all other expenses
necessary or appropriate to the conduct of the business of, and allocable to,
the Company. The MLP Agreement provides that the General Partner will determine
the expenses that are allocable to the Company in any reasonable manner
determined by the General Partner in its sole discretion. Related noninterest
bearing receivables and payables between the General Partner and the Company are
settled in the ordinary course of business. As of December 31, 2000 and 1999,
the Company had a payable to the General Partner of $955 and $840, respectively.
During 2000, 1999, and 1998 expenses allocated to and reimbursed by the Company
totaled $7,717, $8,347, and $9,058, respectively.

F-13

9. Certain Relationships and Related Party Transactions (Continued):
Certain conflicts of interest could arise as a result of the relationships
described above. The Board of Directors and management of the General Partner
have a duty to manage the Company in the best interests of the Unitholders and,
consequently, must exercise good faith and integrity in handling the assets and
affairs of the Company.

Consulting Agreements
As of December 31, 2000, the General Partner has consulting agreements with
affiliates of certain Directors of the General Partner, pursuant to which each
such person or firm has provided and/or will provide consulting services to the
General Partner. The agreements provide for an annual retainer of $25 to $50,
plus an hourly rate for services rendered at the request of the General Partner.
Payments by the General Partner related to consulting agreements in 2000, 1999,
and 1998 amounted to $129, $117, and $144, respectively.

Investment in Affiliate
In October 1999, the Company made an investment in U.S. Timberlands Yakima, LLC
(USTY), an unconsolidated affiliate. USTY, a then newly formed entity organized
to acquire timber properties located in Central Washington and Central Oregon,
is engaged in the growing of trees and sale of logs and standing timber to third
party wood processors. The Company contributed to USTY $294 of cash for 49% of
USTY's common interests (the "Common LLC Interests"). The remaining Common LLC
Interests were acquired for $306 in cash by U.S. Timberlands Holding Group, LLC,
a Delaware limited liability company in which John Rudey and George Hornig,
respectively, the Chairman of the Board and a director of the Company's General
Partner, hold a controlling interest. The Company also acquired all of the
senior preferred interests in USTY (the "Senior or Preferred LLC Interests") for
its contribution to USTY of timberlands consisting primarily of non-income
producing, pre-merchantable pine plantations having an agreed upon value of
$22,000. The Company recorded its investment in the Senior LLC interest at its
$18,850 cost basis for the contributed timberlands. Terms of the Preferred LLC
Interests include a cumulative annual guaranteed return of 5% of the $22,000
agreed upon value of the contributed timberlands. The Preferred LLC Interests
are redeemable at the Company's option on December 31, 2004 or at USTY's option
at any time prior thereto, for a redemption price equal to the agreed upon value
of the Preferred LLC Interests plus any portion of the guaranteed return not
received by the Company prior to the redemption date. Generally, USTY's net
income or losses are allocated to the Common LLC Interests. However, net losses
exceeding the account balances of the Common LLC Interests are allocated to the
Preferred LLC Interest. The Company accounts for the Preferred LLC Interest at
cost plus accrued dividends to the extent earned, reduced by losses, if any, in
excess of the Common LLC Interests. The Company accounts for its Common LLC
Interest by the equity method.

The General Partner of the Company provides management services to USTY for a
fee equal to 2% of USTY's earnings before interest, taxes, depreciation and
amortization. The Company granted U.S. Timberlands Holding Group, LLC an
irrevocable proxy to vote its Common and Preferred Interests. During 1999,
concurrently with and in order to facilitate USTY's acquisition of the
Washington timberlands referred to above, an entity controlled by John M. Rudey
agreed to acquire in the future a portion of the property and any related
liabilities that the Company and USTY were unwilling to acquire, the sale of
which was a condition of the seller to the USTY acquisition. Such entity was
paid $2,700 by the seller for its agreement to acquire such property and any
related liabilities. The General Partner's Conflicts Committee reviewed and
approved the structure of the Company's investment in the affiliate.

In June 2000, the Company purchased timber cutting rights for approximately 4.2
million board feet from USTY for $1.3 million. These timber cutting rights
expire in June 2003. In accordance with equity method accounting, the Company's
portion of the gross profit ($436 or 49%) realized by USTY from the sale of
these timber cutting rights has been eliminated in the Company's consolidated
financial statements.

F-14

9. Certain Relationships and Related Party Transactions (Continued):
In December 2000, USTK sold approximately 8,000 acres of timberland located in
Central Oregon to its affiliate, USTY, for $2,900,000. In accordance with equity
method accounting, the Company's portion of the gross profit ($127 or 49%)
realized by USTK has been eliminated in the Company's condensed consolidated
financial statements.

Payments to Affiliate
See Note 6 regarding interest and commitment fees paid to an affiliate of the
General Partner under the Affiliate Credit Facility.

Severance and Settlement
Selling, general and administrative expenses in 1999 included $675 related to
settlement with former employees of the Company. In 1998, selling, general and
administrative expenses included approximately $1,280 in severance to former
employees. In addition, pursuant to the terms of the General Partner's operating
agreement, the member interests of three former employees were subject to
repurchase at an aggregate price of $385 payable in three annual installments
commencing February 1, 1998. The aggregate repurchase of the member interests
was included in selling, general and administrative expenses in 1998 and the
Company has reimbursed the General Partner for such repurchase payments.

Other Related Party Transactions
During 1999, Glenn A. Zane served as Acting Senior Vice President and Acting
Director of Operations for the Company. The Company paid approximately $821 and
$925 during 2000 and 1999, respectively, to Mason, Bruce & Girard, of which Mr.
Zane is a partner. Such payments were for consulting services and include Mr.
Zane's compensation.

10. Management Incentive Plans:
Unit Option Plans
The Company has a Unit Option Plan, which permits the grant of options (the
"Unit Options") to employees and directors of the General Partner who perform
services for the Company, covering 857,749 Common Units. Unit Options granted
under the Company's Unit Option Plan are determined by the Long-Term Incentive
Plan Committee of the Board of Directors (the "LTIP Committee") and are granted
at fair market value at the date of the grant. During 1997, in connection with
the reorganization of the Company and concurrent with the initial offering of
its public units, 604,153 Unit Options were granted to key employees and
directors of the General Partner. An additional 90,622 Unit Options were granted
to key employees and directors on December 12, 1997, in connection with the
closing of the sale of 1,118,803 Common Units pursuant to the exercise by the
underwriters of their overallotment option and, in 1998, 100,000 Unit Options
were granted to directors and 240,170 options were granted to employees. In
1999, 200,000 Unit Options were granted to directors and 142,620 options were
granted to employees. In 2000, 54,000 Unit Options were granted to employees.
The Unit Options granted expire ten years from the date of grant and become
exercisable automatically upon and in the same proportion as the conversion of
Subordinated Units to Common Units. See further explanation of subordinated
units and related performance criteria in Note 8. Once the performance criteria
are achieved, the Company will record compensation expense for the difference
between the exercise price and fair value of the Common Units, with a
corresponding increase to partnership capital. Although the performance criteria
were met for the years ended December 31, 2000, 1999 and 1998, no compensation
expense was recorded during such years, as the market price of the units was
less than the exercise price during the years.

F-15

10. Management Incentive Plans (Continued):

Weighted
Average
Number of Exercise
Shares Price
------------------ ------------------

Outstanding, December 31, 1997 694,775 14.75 (a)
Unit options granted 340,170 14.75
Unit options cancelled (584,628) 14.75
------------------

Outstanding, December 31, 1998 450,317 14.75
Unit options granted 342,620 13.16
Unit options cancelled (35,310) 14.71
------------------

Outstanding, December 31, 1999 757,627 14.02
Unit options granted 54,000 9.70
Unit options cancelled (54,000) 13.89
------------------

Outstanding, December 31, 2000 757,627 13.75
==================

(a) Options were originally granted with exercise prices ranging
from $21.00 to $21.44 per unit. During December 1998, the
exercise price was reduced to $14.75 per unit by the Board of
Directors.

As of December 31, 2000 exercise prices for options outstanding were between
$5.84 and $14.75 with a weighted average exercise price of $13.75 per unit. The
weighted average remaining contractual life of the options was 8 years. There
were no unit options exercisable at December 31, 2000, 1999 or 1998.

F-16

10. Management Incentive Plans (Continued):
The Company has computed, for pro forma disclosure purposes as required by SFAS
123, the value of the Unit Options granted under the Unit Option Plan. These
computations were made using the Black-Scholes option-pricing model, as
prescribed by SFAS 123, with the following weighted average assumptions for
2000, 1999 and 1998:

2000 1999 1998
------------------ ------------------ ------------------

Risk-free rate of return 5.98% 4.88% 5.50%

Expected dividend yield 9.52% 9.52% 9.52%

Expected life of the Unit Options 5 Years 5 Years 5 Years

Expected volatility 80.59% 49.65% 25.50%

The weighted-average fair value of unit options was $3.61, $2.87 and $2.02 for
options granted in 2000, 1999 and 1998, respectively.

If the Company had adopted the expensing provisions of SFAS 123, the impact on
2000, 1999 and 1998's net income (loss) and net income (loss) per unit would
have been as follows:

Year Ended December 31,
2000 1999 1998
----------- ------------ --------------

Net income (loss) as reported $ (4,080) $ 6,293 $ (6,319)
Net income (loss) pro forma (4,617) 5,846 (6,565)
Basic and diluted net income (loss) per unit - as reported (0.31) 0.48 (0.49)
Basic and diluted net income (loss) per unit - pro forma (0.36) 0.45 (0.51)

For purposes of the pro forma disclosures, the estimated fair value of the unit
options is amortized to expense over their estimated exercise period, which
corresponds to the assumed subordinated units conversion period (see Note 8).

Restricted Unit Plan:
During 1997, the Company authorized the establishment of a restricted unit plan
(the "Restricted Unit Plan"), which allows the Company to grant units (the
"Restricted Units") to employees at the discretion of the LTIP Committee. No
consideration will be payable by the plan participants upon vesting and issuance
of the Restricted Units. Restricted Units granted during the subordination
period would vest automatically upon and in the same proportion as the
conversion of Subordinated Units to Common Units. Restricted Units granted
subsequent to the subordination period are the equivalent of Common Units. No
Restricted Units have been granted as of December 31, 2000.

Income Interests of the General Partner
In connection with the Common Units offering and the related formation of the
General Partner, the General Partner issued income interests to certain officers
and directors of the General Partner at no cost. Such income interests
participate pro rata in cash distributions from USTK and the Company. Under
certain circumstances, the General Partner is required to repurchase the income
interests from officers and directors upon termination of their employment at
fair market value as determined by independent appraisal (see Note 9, severance
and settlement).

F-17

11. Fair Value of Financial Instruments:
A summary of the fair value of the Company's significant financial instruments
and the methods and significant assumptions used to estimate those values is as
follows:

(a) Short-term financial instruments - The fair value of short-term
financial instruments, including cash and cash equivalents, trade and
other receivables, notes receivable, trade accounts payable and certain
accrued liabilities, approximates their carrying amounts in the
financial statements due to the short maturities of such items.

(b) Long-term debt - The estimated fair value of the Company's long-term
debt was approximately $180,000 and $207,000 at December 31, 2000 and
1999, respectively, based on published market quotations.

(c) Interest rate collar agreement - The Company entered into interest rate
collar agreements to manage interest rate risk. Contemplated variable
rate borrowings did not occur, and accordingly, these agreements are
marked to market. The fair value of these agreements is the estimated
amount that the Company would receive or pay upon termination of the
agreements at the balance sheet date or other specific point in time.
The Company terminated the interest rate collar agreements effective in
October 1999. Income or losses on these agreements is reflected in
other income (expense) in the accompanying statements of operations in
the amount of $991 in 1999 and ($361) in 1998.

12. Quarterly Results (Unaudited):

Quarter Ended
-------------------------------------------------------------------
December 31(a) September 30(c) June 30(c) March 31(c) Total Year
-------------- --------------- ---------- ----------- ----------

2000
Revenues $ 25,664 $ 14,064 $ 23,960 $ 11,924 $ 75,612
Gross profit 4,471 2,716 12,881 4,234 24,302
Net income (loss) (2,038) (5,340) 5,119 (1,821) (4,080)
Net income (loss)
per unit-Basic and Diluted (b) (0.15) (0.41) 0.39 (0.14) (0.31)

1999
Revenues $ 19,394 $ 26,175 $ 20,296 $ 11,129 $ 76,994
Gross profit 7,853 11,389 12,254 5,124 36,620
Net income (loss) (346) 3,941 4,413 (1,715) 6,293
Net income (loss)
per unit-Basic and Diluted (b) (0.03) 0.30 0.34 (0.13) 0.48

(a) The quarter ended December 31, 2000 includes revenues of $2,773 and related
costs of $2,641 from a property sale.

(b) See discussion of per unit information in Note 1 of the notes to
consolidated financial statements.

(c) Net income (loss) and net income (loss) per unit for the first three
quarters of 2000 have been restated to reflect an adjustment in recording
the Company's equity in earnings of affiliate. The Company previously
reported net income (loss) for the first, second and third quarter of
($1,552), $5,250 and ($5,237), respectively. The Company previously
reported net income (loss) per unit for the first, second and third quarter
of ($0.12), $0.40 and ($0.40), respectively. The adjustment had no effect
on revenues or gross profit.

13. 401(K) Defined Contribution Plan:
The Company sponsors a 401(k) defined contribution plan which covers
substantially all full-time employees. Company contributions to the plan totaled
$30 in 2000, $34 in 1999 and $26 in 1998.

F-18

14. Commitments and Contingencies:
Log Supply Agreement
On August 30, 1996, the Company entered into a wood supply agreement with
Collins Products, LLC to supply a volume of approximately 34 million board feet
of merchantable timber annually to Collins at market prices. The term of the
agreement is ten years and is renewable for two additional terms of five years,
each at the option of Collins.

Litigation
In November 2000, six purported class action lawsuits were filed against the
General Partner and the Board of Directors of the General Partner (the "Board")
alleging breach of fiduciary duty and self-dealing by the General Partner and
the Board in connection with an announcement on November 2, 2000 that a group
led by senior management has begun the process to explore taking the Company
private (the "Going-Private Transaction").

All six lawsuits were filed in the Court of Chancery of the State of Delaware
for the County of New Castle. Each lawsuit was filed by a unitholder of the
Company, on behalf of all other unitholders of the Company who are similarly
situated, and seeks to have the class certified and the unitholder bringing the
lawsuit named as representative of the class. In addition, the lawsuits seek to
enjoin the Going-Private Transaction, to rescind the Going-Private Transaction
if it is consummated, and to recover damages and attorneys' fees. In addition to
naming the General Partner and the Board as defendants, all six lawsuits name
the Company as a defendant.

In the opinion of management, after consultation with outside counsel, the
pending lawsuits are not expected to have a material adverse effect on the
Company's financial position or results of operations.

15. Subsequent Event:
Distribution
In January 2001, the Board of Directors of the General Partner authorized the
Company to make a distribution of $0.50 per Unit applicable to the fourth
quarter 2000. The total distribution in the amount of $6,561 (including $131 to
the General Partner) was paid on February 14, 2001 to Unitholders of record as
of February 2, 2001.

Preferred Investment
On February 26, 2001, the Company contributed cutting rights on approximately
31,000 acres of timberland located in Central Oregon to its affiliate, USTY. The
cutting rights have an agreed upon value of $12.0 million and were added to the
Company's Preferred Interest in USTY. Terms of the additional senior preferred
interest include a cumulative annual guaranteed return of 5% of the $12.0
million agreed upon value. The additional senior preferred interest is
redeemable at the Company's option on December 31, 2004 or at USTY's option any
time prior thereto for a redemption price equal to the agreed upon value of the
Preferred Interest, either in cash or by returning the contributed timberlands,
plus any portion of the guaranteed return not yet paid by USTY prior to the
redemption date. The Company recorded its additional preferred interest at its
basis for the timber of approximately $10.9 million.

Unit Conversion
In accordance with the Company's Amended and Restated Agreement of Limited
Partnership, 1,070,530 Subordinated Units converted, on a one for one basis,
into Common Units effective February 6, 2001. As of February 6, 2001 the number
of outstanding Common Units is 9,648,017 and the number of Subordinated Units is
3,211,590.

F-19

U.S. Timberlands Yakima, LLC

C O N T E N T S

Page

Independent Auditors' Report 1

Financial Statements:
Balance Sheets as of December 31, 2000 and 1999 2
Statements of Operations for the year ended December 31, 2000 and for the period
from September 28, 1999 (date of inception) to December 31, 1999 3
Statements of Redeemable Preferred Member Interest and Members' Equity for the year
ended December 31, 2000 and for the period from September 28, 1999 (date of
inception) to December 31, 1999 4
Statements of Cash Flows for the year ended December 31, 2000 and for the period from
September 28, 1999 (date of inception) to December 31, 1999 5
Notes to Financial Statements 6

Independent Auditors' Report

To the Board of Directors and Members of
U.S. Timberlands Yakima, LLC

We have audited the accompanying balance sheets of U.S. Timberlands Yakima, LLC
as of December 31, 2000 and 1999, and the related statements of operations,
redeemable preferred member interest and members' equity and cash flows for the
year ended December 31, 2000 and for the period from September 28, 1999 (date of
inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of U.S. Timberlands Yakima, LLC as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the year ended December 31, 2000 and for the period from September 28, 1999
(date of inception) to December 31, 1999, in conformity with generally accepted
accounting principles.

Richard A. Eisner & Company, LLP

New York, New York
January 24, 2001, except as to Note 11 as to
which the date is February 26, 2001

1

U.S. Timberlands Yakima, LLC

Balance Sheets

December 31,
ASSETS 2000 1999
------------ ------------

Current assets:
Cash and cash equivalents (including restricted cash of
$5,485,591 at December 31, 1999) $ 434,434 $ 9,076,481
Accounts receivable 1,574,851 20,418
Receivable from preferred member 1,109,516 -
Notes receivable 760,774 -
Other current assets 7,451 31,766
------------ ------------
Total current assets 3,887,026 9,128,665

Timber and timberlands, net 70,422,986 73,864,206
Equipment, net 67,150 36,316
Deferred financing fees, net 683,500 825,000
------------ ------------
$ 75,060,662 $ 83,854,187
============ ============

LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
Current portion of bank credit facility $ 10,000,000 $ 13,500,000
Accounts payable and accrued expenses 1,195,216 125,225
Advanced payment from customer - 5,485,591
------------ ------------
Total current liabilities 11,195,216 19,110,816

Bank credit facility, less current portion 42,807,000 46,500,000

Commitments and contingencies (Note 9)

Redeemable preferred member interest 20,294,550 18,243,371

Members' equity:
Common members' interest 763,896 -
------------ ------------
$ 75,060,662 $ 83,854,187
============ ============

The accompanying notes are an integral part of these financial statements.

2

Statements of Operations

Period From
September 28,
1999 (Date of
Year Ended Inception) to
December 31, December 31,
2000 1999
------------------- -------------------

Revenues:
Log and stumpage sales $ 25,232,401 $ 517,644
By-products and other 373,565 42,405
------------------- -------------------

25,605,966 560,049
------------------- -------------------

Cost of products sold:
Cost of timber harvested 9,052,747 83,039
Depletion, depreciation and road amortization 6,535,256 135,465
------------------- -------------------

15,588,003 218,504
------------------- -------------------

Gross profit 10,017,963 341,545

Operating, general and administrative expenses 1,368,194 201,138
------------------- -------------------

Operating income 8,649,769 140,407
------------------- -------------------

Other income (expense):
Interest expense (5,586,658) (1,331,063)
Amortization of deferred financing fees (401,500) (81,250)
Interest income 138,181 70,519
Miscellaneous income (expense) 15,283 (6,042)
------------------- -------------------

(5,834,694) (1,347,836)
------------------- -------------------

Net income (loss) $ 2,815,075 $ (1,207,429)
=================== ===================

The accompanying notes are an integral part of these financial statements.

3

Statements of Redeemable Preferred Member Interest and Members' Equity

Redeemable
Preferred Common
Member Members'
Interest Equity
------------------ -------------------

Balance, September 28, 1999 (inception) $ - $ -
Member contributions 18,850,800 600,000
Net loss (607,429) (600,000)
------------------ -------------------

Balance, December 31, 1999 18,243,371 -
Recapture of loss allocated to preferred interest 607,429 -
Guaranteed return to preferred interest 1,443,750 -
Balance of net income - 763,896
------------------ -------------------

Balance, December 31, 2000 $ 20,294,550 $ 763,896
================== ===================

The accompanying notes are an integral part of these financial statements.

4

Statements of Cash Flows

Period From
September 28,
1999 (Date of
Year Ended Inception) to
December 31, December 31,
2000 1999
----------------- ------------------

Cash flows from operating activities:
Net income (loss) $ 2,815,075 $ (1,207,429)

Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization 6,535,256 135,465
Amortization of deferred financing fees 401,500 81,250
Change in:
Accounts receivable (1,554,433) (20,418)
Receivable from preferred member (1,109,516) -
Notes receivable (760,774) -
Other current assets 24,315 (13,016)
Accounts payable and accrued expenses 1,069,991 125,225
Advanced payment from customer (5,485,591) 5,485,591
----------------- ------------------

Net cash provided by operating activities 1,935,823 4,586,668
----------------- ------------------

Cash flows from investing activities:
Acquisition of timber and timberlands (3,077,563) (55,147,146)
Purchase of equipment (47,307) (38,041)
----------------- ------------------

Net cash (used in) investing activities (3,124,870) (55,185,187)
----------------- ------------------

Cash flows from financing activities:
Proceeds from bank credit facility - 60,000,000
Payments made on bank credit facility (7,193,000) -
Deferred financing fees (260,000) (925,000)
Contributions from members - 600,000
----------------- ------------------

Net cash (used in) provided by financing activities (7,453,000) 59,675,000
----------------- ------------------

Net (decrease) increase in cash, cash equivalents and restricted cash (8,642,047) 9,076,481
Cash, cash equivalents and restricted cash, beginning of year 9,076,481 -
----------------- ------------------

Cash, cash equivalents and restricted cash, end of year $ 434,434 $ 9,076,481
================= ==================

Supplemental Cash Flow Information:
Cash paid during the year for interest $ 5,141,792 $ 1,331,063

Noncash Investing and Financing Activities:
Timberlands received for preferred member interest $ - $ 18,850,800

The accompanying notes are an integral part of these financial statements.

5

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2000 and 1999

6

1. Summary of Significant Accounting Policies:
Line of Business
U.S. Timberlands Yakima, LLC (the "Company") was formed in 1999 to acquire
approximately 56,000 acres of timberland in Central Washington and
approximately 54,000 acres of timberland in Central Oregon (see Note 2).
The primary business activity of the Company is the growing of trees and
the sale of logs and standing timber to third party wood processors
located primarily in Central Washington and Central Oregon. U.S.
Timberlands Services Company, LLC (the "Manager"), an entity under common
control with U.S. Timberlands Holding Group, LLC which controls the common
membership interest in the Company, manages the businesses of the Company.
All management decisions related to the Company are made by the Manager.

Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Revenue Recognition
Revenues from delivered log sales are recognized upon delivery to the
customer. Revenues from timber deeds and timberland sales are generally
recognized upon closing. Revenue from timber sold under stumpage contracts
(i.e., where the customer arranges the harvest and delivery of the logs
but without being granted a deed) are recognized at the time the timber is
harvested.

Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Substantially all of the Company's accounts receivable are derived from
sales to third party wood processors. The Company's two largest customers
accounted for 80% and 92% of the Company's aggregate net revenues from log
and stumpage sales for the year ended December 31, 2000 and for the period
ended December 31 1999, respectively. No other single customer accounted
for more than 10% of net revenues from log and stumpage sales. The loss of
these customers could have a material, negative impact on the Company's
results of operations. Management does not, however, expect these
relationships to be discontinued. Credit risk on accounts receivable is
mitigated by control procedures to monitor the credit worthiness of
customers.

Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consists primarily of demand deposits and money
market accounts. Restricted cash at December 31, 1999 consists of a money
market account that was restricted as to its availability under the log
supply agreement with Boise Cascade Corporation (see Note 9). The
restricted cash became available as the Company made sales under the log
supply agreement with Boise Cascade Corporation. At December 31, 1999,
there was $5,485,591 of restricted cash. As of December 31,2000 the
Company had fulfilled its commitments in relation to restricted cash and
there was no restricted cash.

6

1. Summary of Significant Accounting Policies, Continued:
Timber and Timberlands
Timber and timberlands are stated at cost less depletion and amortization
for timber previously harvested. Depletion expense (including amortization
of logging roads) from the Company's sales of logs and timber is based on
the relation of sales volume to the estimated net merchantable inventory
volume on the timberlands. The Company estimates net merchantable timber
inventory using statistical information and data obtained from physical
measurements, site maps, photo-types and other information gathering
techniques. These estimates are updated annually and may result in
adjustments of timber volumes and depletion rates, which are recognized
prospectively. Changes in these estimates have no effect on the Company's
cash flow.

Equipment
Equipment is stated at cost less accumulated depreciation. Maintenance and
repairs are charged to expense as incurred. When assets are sold, retired
or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
income.

The cost of equipment is depreciated using the straight-line method over
the estimated useful lives of the assets. Equipment is depreciated over 3
to 5 years.

Deferred Financing Fees
Deferred financing fees consist of fees incurred in connection with
obtaining the bank credit facility described in Note 5 as well as $234,000
for an interest rate cap entered into between the Company and the Bank of
Montreal under the terms of its bank credit facility during 2000. The
Company amortizes the deferred financing fees over the term of the related
debt.

Advanced Payment From Customer
Advanced payment from customer at December 31, 1999 represents a $6.0
million advance received by the Company from Boise Cascade Corporation
less 1999 log sales under the terms of the log supply agreement with Boise
Cascade Corporation (see Note 9). The Company recognized the advance as
revenue as it made log sales and certain agreed upon timber deed sales
under the log supply agreement during 2000. At December 31, 2000 the
Company had no advanced payments from customers.

Income Taxes
The Company is a limited liability company. Accordingly, the Company is
not liable for federal or state income taxes since the Company's income or
loss is reported on the separate tax returns of the members. Accordingly,
no provision for current or deferred income taxes has been reflected in
the accompanying financial statements.

7

1. Summary of Significant Accounting Policies, Continued:
New Accounting Standard
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities", which, as amended, is
required to be adopted for fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS 133 requires the Company to recognize all derivatives
in the balance sheet at fair value. Derivatives that are not hedges must
be adjusted to fair value through earnings. If the derivative is a hedge,
depending upon the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedge, if any, is
recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Effective
January 1, 2001 the Company will report a loss of $151,742 from the
cumulative effect of adoption of SFAS 133 to reduce the carrying value of
an interest rate cap agreement to its fair value of $6,758.

2. Timberland Acquisitions:
Yakima Timberlands:
On October 4, 1999, the Company acquired approximately 56,000 acres of
timber and timberlands and approximately 700 acres of timber cutting
rights from Boise Cascade Corporation for approximately $55.1 million (the
"Yakima Timberlands"). Substantially all of the purchase price was
allocated to timber, timberlands and logging roads. The acquisition was
financed through a credit facility obtained by the Company (see Note 5).

Antelope Timberlands:
On October 4, 1999, the Company issued a redeemable preferred member
interest (see Note 6) to an affiliate, U.S. Timberlands Klamath Falls, LLC
("USTK") for USTK's contribution of approximately 54,000 acres of
timberland located in Central Oregon (the "Antelope Timberlands"). The
Company recorded the acquisition of timberlands (and the related preferred
interest) at USTK's basis for the timberlands of $18,850,000.

Yainax Timberlands:
On December 29, 2000, the Company purchased approximately 8,000 acres of
timberland located in Central Oregon (Yainax Timberlands) from its
affiliate, USTK, for $2,900,000. Substantially all of the purchase price
was allocated to timber, timberlands and logging roads. The acquisition
was financed through cash flows from operations.

9

3. Timber and Timberlands:
Timber and timberlands consisted of the following at December 31:

2000 1999
----------- -----------

Timber and logging roads $57,734,184 $55,236,946
Timberlands 19,222,326 18,642,000
Water rights 119,000 119,000
----------- -----------

77,075,510 73,997,946
Less accumulated depletion and road amortization 6,652,524 133,740
----------- -----------

$70,422,986 $73,864,206
=========== ===========

4. Equipment:
Equipment consists of the following at December 31:

2000 1999
------- -------

Equipment $85,348 $38,041
Less accumulated depreciation 18,198 1,725
------- -------

$67,150 $36,316
======= =======

5. Bank Credit Facility:
The Company's bank credit facility with the Bank of Montreal (the "Bank")
consists of a revolving bank line of credit ("Line of Credit") and a term
credit facility ("Term Note"), collectively referred to hereafter as the
"Credit Facility". The Credit Facility was obtained by the Company to
facilitate the acquisition of the Yakima Timberlands (see Note 2). The
Line of Credit provides for borrowings of up to $2.0 million and the Term
Note was for $58.0 million. The Credit Facility is collateralized by all
of the Company's assets.

The Credit Facility agreement provides for floating rate interest at
either (a) the LIBOR plus applicable margin (3.50% at December 31, 2000)
based on the Company's leverage ratio; or (b) the Bank's prime rate plus
applicable margin (2.00% at December 31, 2000) based on the Company's
leverage ratio. In addition, the Credit Facility agreement provides for a
reduction of 0.25% from the applicable margin under either option once the
Company has achieved a 55% advance rate on its borrowing base. At December
31, 2000, the effective rates under the LIBOR option and the Bank's prime
rate option were 10.28% and 11.50%, respectively. At December 31, 2000,
$51,000,000 and $1,807,000 of the outstanding borrowings under the Credit
Facility bore interest at the LIBOR plus applicable margin interest rate
option and the Bank's prime rate plus applicable margin interest rate
option, respectively.

9

5. Bank Credit Facility, Continued:
Under the terms of the Credit Facility, the borrowing base is equal to the
sum of 65% of timber deed receivables due within eighteen months, 75% of
eligible receivables, 100% of the restricted cash advanced by Boise
Cascade Corporation (see Notes 1 and 9) and 60% of the total merchantable
timber value as determined by, and reviewed quarterly by, the Bank's
independent consultant. The advance rate for the total merchantable timber
value will decrease to 55% at December 30, 2001 under the terms of the
agreement. The Company recalculates the borrowing base monthly and is
required to pay down all borrowings under the Credit Facility in excess of
the borrowing base. The term of the Credit Facility is through September
30, 2002, at which time all outstanding borrowings under the Credit
Facility are due.

The Credit Facility contains certain restrictive covenants, including
limits on the ability of the Company to make capital expenditures, make
cash distributions (including the preferred interest guaranteed return),
incur liens, incur additional indebtedness, make loans and investments,
sell property and pay management fees. In addition, the Credit Facility
contains certain financial ratio covenants. The Company was in compliance
with these covenants at December 31, 2000.

To the extent that the Company's total borrowings under the Credit
Facility do not exceed the Company's borrowing base, the Company may
utilize the $2.0 million Line of Credit as a working capital facility. The
Company had outstanding borrowings of $2.0 million at December 31, 1999
and no outstanding borrowings at December 31, 2000 under the Line of
Credit.

As of December 31, 2000 and 1999, the Company had outstanding borrowings
of $52,807,000 and $58,000,000, respectively, under the Term Note.

The Company anticipates $10,000,000 in maturities during 2001 with the
remaining $42,807,000 of the Credit Facility due and payable during 2002.

6. Members' Interest and Redeemable Preferred Interest:
Common Interests:
Concurrent with the acquisition of the Yakima Timberlands (see Note 2),
U.S. Timberlands Holding Group, LLC and U.S. Timberlands Company, LP
contributed $306,000 and $294,000, respectively, for common member
interests of 51% and 49%, respectively, (the "Common Interests") in the
Company.

Preferred Interest:
Concurrent with the acquisition of the Yakima Timberlands (see Note 2),
USTK contributed the Antelope Timberlands (see Note 2) having an agreed
upon value of $22.0 million for all senior preferred interests ("Preferred
Interest") in the Company. Terms of the Preferred Interest include a
cumulative annual guaranteed return of 5% of the $22.0 million agreed upon
value. The Preferred Interest is redeemable at USTK's option on December
31, 2004 or at the Company's option any time prior thereto for a
redemption price equal to the agreed upon value of the Preferred Interest,
either in cash or by returning the contributed timberlands, plus any
portion of the guaranteed return not yet paid by the Company prior to

10

6. Members' Interest and Redeemable Preferred Interest, Continued:
the redemption date. As of December 31, 2000 the cumulative guaranteed
return amounted to $1,443,750, including interest, which, through an
allocation of net income has increased the carrying amount of the
redeemable preferred member's interest. No payments of the return have
been made.

Partnership Income (Loss):
As provided by the Company's operating agreement, income attributable to
the Common Interests is generally allocated according to their percentage
of the outstanding Common Interests. However, net losses exceeding the
account balances of the Common Interests are allocated to the Preferred
Interest. Losses, if any, allocated to the Preferred Interest are
recaptured prior to any income being allocated to the Common Interests. At
December 31, 1999, $607,429 in losses had been absorbed by the Preferred
Interest. These losses were fully recovered by the Preferred Interest
during 2000.

7. Fair Value of Financial Instruments:
The fair value of the Company's financial instruments are presented below.
The estimates require subjective judgments and are approximate. Changes in
methodologies and assumptions could significantly affect estimates.

Short-term financial instruments:
The fair value of short-term financial instruments, including cash and
cash equivalents, trade and other receivables, notes receivable, trade
accounts payable and certain accrued liabilities, approximate their
carrying amounts in the financial statements due to the short maturities
of such items.

Long-term debt:
The estimated fair value approximates the carrying value of $52,807,000
and $60,000,000 at December 31, 2000 and 1999, respectively given the
nature of the debt and that it is tied to major interest rate indexes.

Interest rate cap agreement:
The Company entered into an interest rate cap agreement to manage interest
rate risk during 2000. The fair value of this agreement at December 31,
2000 is approximately $6,758 .

11

8. Quarterly Results (Unaudited):

Quarter Ended
--------------------------------------------------------------------
December 31 (a) September 30 (a) June 30 (a) March 31 (a) Total Year
--------------- ---------------- ----------- ------------ ----------

2000
Revenues $ 8,429,218 $ 7,404,347 $ 4,987,548 $ 4,784,853 $ 25,605,966
Gross profit 2,735,340 1,975,390 2,196,517 3,110,716 10,017,963
Net income (loss) 1,170,504 (124,862) 368,876 1,400,557 2,815,075

1999
Revenues $ 560,049 $ - $ - $ - $ 560,049
Gross profit 341,545 - - - 341,545
Net income (loss) (1,207,429) - - - (1,207,429)

(a)As the Company was formed on September 28, 1999 (date of inception),
1999 information is only presented for the quarter ended December 31,
1999. All transactions in 1999 occurred between October 4, 1999 and
December 31, 1999.

9. Commitments and Contingencies:
Lease Agreement:
The Company leases its facility under a noncancelable operating lease
expiring in October 2004. Rent expense was $17,370 and $3,476 for the
years ended December 31, 2000 and 1999, respectively. Future minimum
payments required under the operating lease agreement are:

Year ending December 31:

2001 $ 18,500
2002 18,500
2003 18,500
2004 15,500
---------------
Total minimum lease commitments $ 71,000
===============

Log Supply Agreement:
Concurrently with the acquisition of the Yakima Timberlands (see Note 2),
the Company entered into a log supply agreement (the "Agreement") with
Boise Cascade Corporation ("Boise") to supply a volume of approximately 11
million board feet ("MMBF"), 25 MMBF, 25 MMBF, 9 MMBF, and 9MMBF in 1999,
2000, 2001, 2002, and 2003, respectively, of merchantable timber to Boise
at market prices. The term of the Agreement is through November 2003 and
may be renewed by mutual agreement of the parties for successive five year
periods. Boise shall have the right to terminate the Agreement upon
permanent closure of its Yakima, Washington sawmill or upon permanent
closure of its Yakima, Washington plywood plant.

12

9. Commitments and Contingencies, Continued:
Under the terms of the Agreement, and concurrently with the closing of the
acquisition of the Yakima Timberlands, Boise prepaid $6.0 million to the
Company against the 1999/2000 Agreement commitment, representing
approximately 35% of the current estimated market value of the 1999/2000
commitment under the Agreement. The Company recorded the $6.0 million
advance as restricted cash and as an advance payment from customer during
1999 (see Note 1). Under the Agreement, the Company and Boise agreed upon
values of 39 parcels on the Yakima Timberlands and Boise was granted a
first priority deed of trust on the parcels. As of December 31, 2000 the
Company had fulfilled its commitment under the Agreement and Boise had
reconveyed all 39 parcels back to the Company, thus restoring the first
priority of the Bank under the Credit Facility.

Litigation:
The Company is involved in legal proceedings and claims arising in the
normal course of business. In the opinion of management, the outcome of
such legal proceedings and claims will not have a material adverse effect
on the Company's results of operations and financial position.

10. Related Party Transactions:
The Manager receives reimbursement for reasonable and necessary direct and
indirect expenses related to managing the Company in addition to a fee
(the "Manager's Fee") of 2% of the Company's EBITDDA (as defined in the
Company's operating agreement). There is an annual cap of $750,000 on the
total payments to the Manager including the Manager's Fee. During 2000 and
1999 the Company paid a total of $530,881 and $182,112, respectively. Such
reimbursements included a Manager's Fee of $0 and $6,042, for 2000 and
1999, respectively. The Manager waived the Manager's Fee for 2000.

During 1999, concurrently with and in order to facilitate the Company's
acquisition of the Yakima Timberlands (see Note 2), an entity controlled
by John M. Rudey, (the controlling member of both the Manager and U.S.
Timberlands Holding Group, LLC) agreed to acquire in the future a portion
of the property and any related liabilities that the Company was unwilling
to acquire, the sale of which was a condition of the seller to the Yakima
Timberlands acquisition. Such entity was paid $2.7 million by the seller
for its agreement to acquire such property and related liabilities.

In June 2000, the Company made a timber deed sale for approximately 4.2
million board feet to its affiliate, USTK, for $1.3 million. The timber
deed expires in June 2003.

In July 2000, the Company entered into a Road Upgrade Agreement with U.S.
Timberlands Holding Group, LLC, which controls the common membership
interest in the Company, whereby U.S. Timberlands Holding Group, LLC is
responsible for paying the costs of all road construction, reconstruction,
improvements, upgrades, new or repaired bridges, culverts, fords and other
stream-crossing structures on the Yakima Timberlands. U.S. Timberlands
Holding Group, LLC charges a quarterly fee to the Company for use of the
roads that have been built or upgraded per the agreement. During 2000,
U.S. Timberlands Holding Group, LLC reimbursed the Company for
approximately $1.0 million in road upgrade expenditures and the Company
was charged $48,466 for road use fees for 2000 under the agreement. As of
December 31, 2000 the Company had a payable due to U.S. Timberlands
Holding Group, LLC for the $48,466 in road use fees.

13

10. Related Party Transactions, Continued:
In December 2000, the Company purchased approximately 8,000 acres of
timberland for $2,900,000 from its affiliate, USTK (see Note 2).

As of December 31, 2000 the Company had a receivable of $1,009,516 from
its affiliate USTK for a deposit that was made for the Company into USTK's
bank account. In addition, the Company had a receivable of $100,000 from
USTK at December 31, 2000 for the excess of the purchase price paid for
the Yainax Timberlands over appraised value as per the purchase agreement
with USTK.

11. Subsequent Event:
On February 26, 2001, the Company received cutting rights on approximately
31,000 acres of timberland located in Central Oregon from its affiliate,
USTK. The cutting rights have an agreed upon value of $12.0 million and
were added to the senior preferred interest in the Company. Terms of the
additional senior preferred interest include a cumulative annual
guaranteed return of 5% of the $12.0 million agreed upon value. The
additional senior preferred interest is redeemable at USTK's option on
December 31, 2004 or at the Company's option any time prior thereto for a
redemption price equal to the agreed upon value of the Preferred Interest,
either in cash or by returning the contributed timberlands, plus any
portion of the guaranteed return not yet paid by the Company prior to the
redemption date. The Company recorded the acquisition of the timber (and
the related preferred interest) at USTK's basis for the timber of
approximately $10.9 million.

14